Technology Choice and Capacity Portfolios under Emissions Regulation
By David F. Drake, Paul R. Kleindorfer, Luk N. Van Wassenhove. 2016
400 citations recorded by the source corpus.
We study the impact of emissions tax and emissions cap‐and‐trade regulation on a firm's technology choice and capacity decisions. We show that emissions price uncertainty under cap‐and‐trade results in greater expected profit than a constant emissions price under an emissions tax, which contradicts popular arguments that the greater uncertainty under cap‐and‐trade will erode value. We further show that two operational drivers underlie this result: (i) the firm's option not to operate, which effectively right‐censors the uncertain emissions price; and (ii) dispatch flexibility, which is the firm's ability to first deploy its most profitable capacity given the realized emissions price. In addition to these managerial insights, we also explore policy implications: the effect of emissions price level, and the effect of investment and production subsidies. Through an illustrative example, we show that production subsidies of higher investment and production cost technologies (such as carbon capture and storage technologies) have no effect on the firm's optimal total capacity when firms own a portfolio of both clean and dirty technologies, but that investment subsidies of these technologies increase the firm's total capacity, conditionally increasing expected emissions. A subsidy of a lower production cost technology, on the other hand, has no effect on the firm's optimal total capacity in multi‐technology portfolios, regardless of whether the subsidy is a production or investment subsidy.
Subfields: Economics and Econometrics, Finance, Renewable Energy, Sustainability and the Environment
View Paper: https://www.semanticscholar.org/paper/0ffb65d9bad0cc5dc0c2d76fd0d2adc8c56f09e9
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Citations in the corpus
- Promoting electric automobiles: supply chain analysis under a government’s subsidy incentive scheme (2013, background): “The two papers are (i) Drake et al. (2012), who examined the impact of emissions cap-and-trade and emissions tax regulation on a firm’s green technology choice and capacity decisions, and (ii) Krass et al.”
- Sustainability investment under cap-and-trade regulation (2014, positive): “Similar with Drake et al. (2012), we also consider the emission could be reduced by investing on the sustainable technology in production.”