Investors’ reaction to the government credibility problem: A real option analysis of emission permit policy risk
研究了二氧化碳排放许可市场中政府可信度风险对电力厂投资决策的影响，发现可信度风险会促使更多投资于非绿色资源并增加等待价值，但在极端情况下可能加速投资。
In relation to creating a CO2 emission permit market, there are two types of climate change policy risks: (1) It is uncertain whether and when a cap-and-trade system will be implemented; and (2) once a policy is in place, there may be government credibility issues. This paper examines the effect of these policy risks on real option decisions of electric power plant investment. To model both an investment decision and generation flexibility, this study evaluates an exotic compound American option on multiple strips of European spread options through the implementation of least squares Monte Carlo simulation. Government credibility risk leads to more investment in “less green” resources and induces additional cash flow variation, which increases the average time to investment (value of waiting). However, in an extreme case, government credibility can actually hasten investment because the risk may be more favorable to electric power companies. Furthermore, if emission trading is planned to be implemented in the future (e.g., 2020), and the market believes that the probability of successful implementation is low, firms will build a “less green” plant early to benefit from the period before the green rule is applied.