How policy choice affects investment in low-carbon technology: The case of CO sub(2) capture in indirect coal liquefaction in China

• Published in: Energy (Oxford) 2014-08, Vol.73, p.670-679
• Main Authors: Zhou, Wenji, Zhu, Bing, Chen, Dingjiang, Zhao, Fangxian, Fei, Weiyang
• Format: Article
• Language: English
• Subjects: Carbon; Carbon capture and storage; Carbon dioxide; China; Financing; Investment; Markets; Policies
• ISSN: 0360-5442
• DOI: 10.1016/j.energy.2014.06.068

An improved understanding of investment decisions on low-carbon technology will greatly facilitate assessing the effectiveness of carbon emissions mitigation policies. We use the example of implementing CCS (carbon capture and storage) within ICL (indirect coal liquefaction), a controversial technology in China, by constructing a RO (real options) model for the investment decision-making process to assess how different climate policies affect low-carbon technology investors under highly uncertain circumstances. We find that a carbon tax provides the strongest signal for investment and that a market-based measure provides firms with flexibility. Moreover, different types of carbon markets generate substantially different effects on firm behavior, and the CO sub(2) price level exerts a more powerful influence on investors than market volatility or the policy's implementation date. Considering the regional disparities among the coal-abundant but less-developed provinces and the affluent coastal regions in China, we suggest that a sub-national COM (clean development mechanism) would complete the current domestic policy framework to balance the development requirement and CO sub(2) abatement, whereas extraordinary administrative efforts are necessary to raise the current price of CO sub(2) credits to an effective level, to broaden the carbon market coverage and consolidate the carbon market foundation.