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Real options and CO 2 reduction policies for climate change

Real options and CO 2 reduction policies for climate change Managing CO 2 emission control policy is a complex problem because of uncertainties in CO 2 emission process and CO 2 uptake, and irreversibility in investment decisions. Traditional method using benefit cost analysis for evaluation of CO 2 reduction policy is not effective in presence of deep uncertainties. Real options analysis approach is an alternative methodology which incorporates uncertainties and flexible timing in decision making. It allows the policymaker to learn and then act when the more information is available to resolve the uncertainties. This paper proposes a methodology with real options analysis for analysing the timing and conditions of adoption of CO 2 reduction policies. CO 2 emission is modelled as a stochastic process and CO 2 observation data are used to statistically estimate the parameters of the stochastic CO 2 emission model. A perpetual time model is developed to investigate CO 2 emission cutback policy and CO 2 concentration abatement policy and closed form analytical solutions are provided. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of System of Systems Engineering Inderscience Publishers

Real options and CO 2 reduction policies for climate change

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Publisher
Inderscience Publishers
Copyright
Copyright © Inderscience Enterprises Ltd. All rights reserved
ISSN
1748-0671
eISSN
1748-068X
DOI
10.1504/IJSSE.2013.056293
Publisher site
See Article on Publisher Site

Abstract

Managing CO 2 emission control policy is a complex problem because of uncertainties in CO 2 emission process and CO 2 uptake, and irreversibility in investment decisions. Traditional method using benefit cost analysis for evaluation of CO 2 reduction policy is not effective in presence of deep uncertainties. Real options analysis approach is an alternative methodology which incorporates uncertainties and flexible timing in decision making. It allows the policymaker to learn and then act when the more information is available to resolve the uncertainties. This paper proposes a methodology with real options analysis for analysing the timing and conditions of adoption of CO 2 reduction policies. CO 2 emission is modelled as a stochastic process and CO 2 observation data are used to statistically estimate the parameters of the stochastic CO 2 emission model. A perpetual time model is developed to investigate CO 2 emission cutback policy and CO 2 concentration abatement policy and closed form analytical solutions are provided.

Journal

International Journal of System of Systems EngineeringInderscience Publishers

Published: Jan 1, 2013

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