Abstract:
In a previous paper, we used the Global 2100 model to explore the implications of a carbon constraint upon domestic energy costs and the resulting effects on the U.S. economy as a whole (Manne and Richels (1990). The impact of a CO2 limit will depend on the technologies and resources available for meeting demands as well as on the demands themselves. Given the enormous uncertainty surrounding these factors, losses were calculated under alternative assumptions about each.

Abstract:
Whether companies invest in new power facilities at a particular point in time, or delay, depends upon the perceived evolution of uncertainties and the investors' attitudes to risk and return. With additional risks emerging through climate change mitigation mechanisms, the propensity to invest may increasingly depend upon how each technology and company is exposed to carbon price uncertainty. We approach this by estimating the cumulative probabilities of investment over time in various technologies as a function of behavioral, policy, financial and market assumptions. Using a multistage stochastic optimization model with exogenous uncertainty in carbon price, we demonstrate that detailed financial analysis with real options and risk constraints can make substantial difference to the investment propensities compared to conventional economic analysis. Further, we show that the effects of different carbon policies and market instruments on these decision propensities depend on the characteristics of the companies and may induce market structure evolution.