The interplay between technology options, market uncertainty, and policy in zero-carbon investment decisions

Using a real-option approach, we study the decision of a private power generator considering investment in a zero-CO₂-emissions plant. Specifically, we analyze the investment decision in mutually exclusive technologies under the presence of market uncertainty, for different scenarios and under different policy regimes within each scenario. The scenarios are based on emissions targets, such as net-zero-CO₂ emissions by 2050. The policy regimes are based on whether or not the targets are binding. We find that if there are fewer available zero-CO₂-technology options there is less hesitation to invest, which potentially leads to earlier investment. We also find that some policies are more effective than others in encouraging investment: incentive payments are somewhat effective, penalties for not reaching zero emissions by a specified future date are more effective; a steadily increasing CO₂-emission-allowance price also speeds up investment.