Benefits and limitations of long climate commitments to trigger Investment (article non disponible)

Mardi | 2012-03-20

Audrey LAUDE

Limit climate change requires deep transformations of the energetic system and thereby heavy investments. Nevertheless, long-term climate targets and the means to reach them are still largely undefined, as evidenced by Copenhagen agreement that has failed to impose a binding commitment. More generally, outcomes of negotiation rounds are hardly predictable. This regulatory uncertainty hampers investments because investors can often postponed their decision easily. Our purpose is to analyze how this uncertainty affects investor’s behavior, through notably the role of commitment period length. Negotiations are assumed to be set on a regular basis, e.g. every five years. We model investment decision for a Carbon Capture and Storage (CCS) project on a coal plant, using a real option framework. We show that long periods trigger investment, but the benefits of an additional year are higher for short than for long commitments. 5-years periods have been established has a minimum, but enlarge commitments above 10 years is less relevant, even for very carbon sensitive projects. Results are similar if a long-term target ambiguity is added, which means that the investor does not know if climate policy is going to be highly or moderately stringent.