Transition from coal to natural gas power plants under CO2 consideration: a real options approach. (23rd December 2020)

• Record Type: Journal Article
• Authors: Wang, Chung-Hsiao; Min, K. Jo
• Is Part Of: International journal of sustainable economy. Volume 12:Number 4(2020)
• Page Start: 344
• Page End: 363
• Publication Date: 2020-12-23
• Subjects: electric power -- CO2 prices -- real options -- geometric Brownian motion -- GBM -- closed-form solutions -- power plant transition; Sustainable development -- Periodicals; Economics -- Periodicals; 338.92705
• Languages: English
• ISSNs: 1756-5804

Abstract

As a way to alleviate global warming, there have been major initiatives to reduce carbon dioxide (CO2 ) emission amount across the world. In Western Europe as well as in California, market-based permits for CO2 emission have been a major enabler of such initiatives. In this paper, under the assumption of such market-based permits where permit price is inherently uncertain, we model and analyse a transition process from coal-based to natural gas-based power plants with less CO2 emission based on a real options approach. Specifically, we apply existing real options approach to derive closed-form analytical solutions for such a transition. Subsequent managerial insights and policy implications are provided in the context of CO2 emission reduction and environmental ramifications.