Influence of emissions trading design options on investment patterns for electricity generation using real options analysis

Abstract

Putting a price on greenhouse gas emissions is a fundamental policy for climate changemitigation. Without adequate policy instruments, it will be significantly difficult and expensive to put the world on track to meet the goal of limiting the temperature rise to 2°C. (OECD 2009). Emission trading schemes seem to have gained credibility and are being implemented and planned in several countries and regions with the aim to reduce emissions while minimizing the costs of compliance. Organizations involved in the emission trading scheme as liable entities will need to manage their resources appropriately to remain competitive. The electricity generation sector has particular characteristics that must be taken into account if emission trading systems are expected to be effective in reducing long-term emissions.The long-lived nature of the investments in the sector is critical, and inappropriate design choicesforemission trading systemscan lead to a locking-in of the high-emission infrastructure.This Master Thesis analyzes how different emission trading design choices influence the decision to invest inphotovoltaictechnology instead of fossil fuel technology for the generation of electricity based on a real options model that will take into consideration uncertainties both associated with the costs of the generation technology and with the greenhouse gases trading market. Gaining a better understanding on how such investment decisions are influenced by the modification of the emission trading scheme design choices will help to improve the efficiency of future emission trading schemes and to deliver a low-carbon future.