Effect of Power Generation Mix and Carbon Emissions Tax on Investment Timing

Electricity production accounts for around 40% of global energy-related CO2 emissions and it is expected that the electricity demand increases to twice the current level in 2050. Therefore it is necessary to invest in low-carbon thermal power plants, nuclear and renewable energy for realizing low-carbon economy. These policies may require a large amount of investment costs, and additionally, the uncertainty increases in a situation surrounding power generation projects and their investments. On the other hand, environmental policy for encouraging use of low carbon emission generation power includes an internalization of the externality for CO2 emissions such as carbon-emissions tax. In this study, we develop a real option model of power generation investments allowing for two uncertainties of the market risk and the introduction of the policy. We analyze the effect of the uncertainties on the power generation mix and the investment timing.