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Emissions Trading as a Policy InstrumentEvaluation and Prospects$
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Marc Gronwald and Beat Hintermann

Print publication date: 2015

Print ISBN-13: 9780262029285

Published to MIT Press Scholarship Online: January 2016

DOI: 10.7551/mitpress/9780262029285.001.0001

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The Influence of Permit-Price Uncertainty and Lobbying on Energy Investments

The Influence of Permit-Price Uncertainty and Lobbying on Energy Investments

Chapter:
(p.87) 5 The Influence of Permit-Price Uncertainty and Lobbying on Energy Investments
Source:
Emissions Trading as a Policy Instrument
Author(s):

Philipp Hieronymi

David Schüller

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262029285.003.0005

In this model an investor can choose between replacing a pre-determined generation capacity by investing into wind or gas power. He also has the option to lobby in order to increase the profitability of either energy type. If he chooses gas power, he has to obtain emission permits. The price of emissions develops according to a geometric Brownian Motion. We find that current permit prices are insufficient to induce renewable investment and wind power lobbying must be very effective in order to induce investment in this power type. The benefit of lobbying for gas power seems to low due to the low permit price. In a United States like situation with no permit market, no effective renewable support scheme, and very strong gas lobbying efforts, we find that close to no renewable capacity will be installed. Depending on the scenario, the social cost of subsidizing wind energy can be large.

Keywords:   Lobbying, Investment under Uncertainty, Emission Markets, Energy Investment, Real Option

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