Risk aversion and CO2 regulatory uncertainty in power generation investment: Policy and modeling implications |
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| Institution: | 1. Department of Administrative Management, Business School, Jinan University, Guangzhou 510632, China;2. Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai 200030, China;1. Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology, Trondheim (NTNU), Norway;2. Department of Energy Systems, Institute for Energy Technology(IFE), Kjeller, Norway |
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| Abstract: | We consider a simulation of risk-averse producers when making investment decisions in a competitive energy market, who face uncertainty about future regulation of carbon dioxide emissions. Investments are made under regulatory uncertainty; then the regulatory state is revealed and producers realize returns. We consider anticipated taxes, grandfathered permits and auctioned permits and show that some anticipated policies increase investment in the relatively dirty technology. Beliefs about the policy instrument that will be used to price carbon may be as important as certainty that carbon will be priced. More generally, a failure to consider risk aversion may bias policy analysis for the power sector. |
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