Luis M. Abadie

Evaluation of two alternative carbon capture and storage technologies: A stochastic model

* Carbon dioxide capture and storage (CCS) is one of the technologies for fighting climate change in the future. The use of CO2 for enhanced oil recovery (EOR) paired with storage in deep saline formations (DSF) could effectively help to support CCS demonstration projects, reduce costs and thus guarantee the future economic viability of power plants incorporating both EOR and CCS. * CCS without EOR is highly unprofitable at both current and expected carbon market prices. * The profitability of these technologies is highly influenced by the volatility of future electricity prices, oil prices and carbon allowance prices. * Investment in EOR and secondary DSF storage can only be profitable with a long-term equilibrium price for oil higher than

An analysis of the causes of the mitigation bias in international climate finance

51/barrel. When the investment decision can be made at any time the trigger value for optimal investment is significantly higher at

Valuing uncertain cash flows from investments that enhance energy efficiency

89/barrel. However, an increase in the investment cost can substantially raise these trigger prices.

Investing in Adaptation: Flood Risk and Real Option Application to Bilbao

Research on international climate finance got a new impetus from the United Nations Framework Convention on Climate Change Cancun Accords in 2010 which pledge to mobilize US dollars (USD) 100 billion in international climate financing annually by 2020. The Accords’ specification that adaptation must be addressed with the same priority as mitigation is not reflected in current patterns of international climate finance where we face a strong bias towards mitigation finance. A recent study by Buchner et al. (2011) ascertains a split between mitigation and adaptation finance of 95:5. In this paper, we investigate potential reasons for this bias. In our framework, we distinguish different decision layers and actors involved in international climate finance in order to categorize the causes responsible for the low priority of adaptation in international finance. The identification of obstacles for international adaptation funding is a first crucial step in the search for ways to overcome respective barriers. We find several different causes of the mitigation bias and these might offer starting points for policies aiming at raising adaptation finance and curing this bias. Furthermore, we describe interrelations between these causes which effective policies have to take into account.

Climate Risk Assessment under Uncertainty: An Application to Main European Coastal Cities

There is a broad consensus that investments to enhance energy efficiency quickly pay for themselves in lower energy bills and spared emission allowances. However, investments that at first glance seem worthwhile usually are not undertaken. One of the plausible, non-excluding explanations is the numerous uncertainties that these investments face. This paper deals with the optimal time to invest in an energy efficiency enhancement at a facility already in place that consumes huge amounts of a fossil fuel (coal) and operates under carbon constraints. We follow the Real Options approach. Our model comprises three sources of uncertainty following different stochastic processes which allows for application in a broad range of settings. We assess the investment option by means of a three-dimensional binomial lattice. We compute the trigger investment cost, i.e., the threshold level below which immediate investment would be optimal. We analyze the major drivers of this decision thus aiming at the most promising policies in this regard.

Measuring Performance of Long-Term Power Generating Portfolios

Abstract Investment decisions in adaptation are usually made under significant uncertainty due to climate change and socio-economic trends. In this study, we propose three ways to incorporate climate and socio-economic uncertainty into the assessment of an adaptation infrastructure designed to cope with flood-risk in the city of Bilbao. First, we use stochastic modelling to estimate the present value of expected damage over a time period, considering that extreme events may increase in the future. Second, we develop an additional calculation that incorporates two risk measures used in financial economics: Value-at-Risk and Expected Shortfall, the latter being a less common but better risk indicator. Third, we illustrate a case of Real Options Analysis (ROA) in which a binomial tree is used to study whether the best decision at present is to invest now or to delay the investment decision.

THE EUROPEAN EMISSION TRADING SCHEME: IMPLICATIONS FOR LONG-TERM INVESTMENT VALUATION

This paper analyses the risk of extreme coastal events in major European coastal cities using a stochastic diffusion model that is calibrated with the worst case emission scenario from the Intergovernmental Panel for Climate Change (IPCC), i.e. the representative concentration pathway (RCP) 8.5. The model incorporates uncertainty in the sea-level rise distribution. Expected mean annual losses are calculated for 19 European coastal cities, together with two risk measures: the Value at Risk (VaR) and the Expected Shortfall (ES). Both measures are well-known in financial economics and enable us to calculate the impact of the worst SLR paths under uncertainty. The results presented here can serve as valuable inputs for cities in deciding how much risk they are willing to accept, and consequently how much adaptation they need depending on the risk aversion of their decision-makers.

What Role Can Taxes and Subsidies Play in Changing Diets

We propose a model for assessing the performance of generation mixes in a mean-variance context. In particular, we focus on the expected price of electricity and the price volatility that result from different generating portfolios that change over time (because of investments and retirements). Our valuation model rests on solving an optimization problem. At any time it minimizes the total costs of electricity generation and delivery. A distinctive feature of our model is that the optimization process is subject to the behavior of stochastic variables (e.g. load, wind generation, fuel prices). Thus we deal with a problem of stochastic optimal control. The model combines optimization techniques, Monte Carlo simulation over the decades-long planning horizon, and market data from futures contracts on commodities. It accounts for uncertain dynamics on both the demand side and the supply side. The aim is to assist decision makers in trying to assess electricity portfolios or supply strategies regarding generation infrastructures. To demonstrate the model by example we consider the case of Great Britain’s generation mix over the next 20 years. In particular, we compare three future energy scenarios and the contracted background, i.e. four time-varying generating portfolios. Major British power producers are covered by the EU Emissions Trading Scheme (ETS), so they operate under binding greenhouse gas (GHG) emission constraints. Further, the UK Government has announced a floor price for carbon in the power sector from 1 April 2013. The generation mix is optimally managed every period by changing input fuel and electricity output as required.

Energy Efficiency Policy in the USA: The Impact of the Industrial Assessment Centres (IAC) Programme and State and Regional Climate Policy Actions

As the EU Emission Trading Scheme (EU ETS) moves towards its third phase (2013–2020) it has undergone numerous improvements, including a gradual increase in the use of auctions as a distribution mechanism and the prevalence of sectoral criteria over National Allocation Plans. At the same time, emission allowances with maturities up to December 2020 have begun to be traded on the futures markets, reflecting the impact that the new measures are expected to have on prices. This paper sets out to obtain a financial valuation of the impact and analyze whether the resulting prices will facilitate investment in installations to bring about reductions in emissions. The effect on investments of the potential introduction of caps and floors on emission trading prices is also studied.

European CO2 prices and carbon capture investments

The study examines the use of fiscal instruments to achieve a healthier diet while reducing CO2 emissions. The methodology is to minimize the deadweight losses in attaining a healthy diet. Given that the shift should not impose a large burden on the consumer, the analysis is conducted with a system of taxes and subsidies - a bonus-malus framework. The model generates heavy subsidies on carbohydrates and heavy taxes on red meats, which would be politically unacceptable. A more plausible goal may be to aim to close the gap between the current diet and a healthier one by 20-25 percent.