GREEN INVESTMENT AND ASSET STRANDING UNDER TRANSITION SCENARIO UNCERTAINTY

In this paper, the authors develop a real-options approach to evaluate energy assets and potential investment projects under transition scenario uncertainty.

Dynamic scenario uncertainty is modelled by assuming that the economic agent acquires the information about the scenario progressively by observing a signal. The problem of valuing an investment is formulated as an American option pricing problem, where the optimal exercise time corresponds to the time of entering into a potential investment project or the time of selling a potentially stranded asset. To illustrate their appproach, the authors apply representative scenarios from different integrated assessment models to the examples of a coal-fired power plant without Carbon Capture and Storage (CCS) and potential investment into a biomass power plant with CCS.

Peter Tankov is Scientific Director of the Green and Sustainable Finance (GSF) Program at Institut Louis Bachelier and Maria Flora post-doctoral researcher at Center for Research in Economics and Statistic (CREST).

This research was supported by ADEME (Agency for Ecological Transition) in the context of SECRAET project, and by the FIME (Finance for Energy Markets) research initiative of the Institut Europlace de Finance.