Posted: January 12th, 2024

Evaluate Power Plants and Abatement Costs in Carbon Markets

Evaluate Power Plants and Abatement Costs in Carbon Markets

Carbon markets are relatively new markets, which have been created by the introduction of tradable allowance certificates. A company must own a sufficient number of them in order to avoid being charged a penalty for its carbon dioxide emissions. This is meant to encourage companies to reduce carbon emissions, for example by investing in new technologies or by switching to different fuel sorts. The emission certificates will obviously also has an influence on the value of power plants, as electricity producers will not only have to buy the fuel but also emission certificates to cover the produced emissions.

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The aim of the dissertation will be to give a short introduction into the field of carbon markets and to model the allowance price by considering it as a derivative on the demand and on the total emissions to date. This will lead to a nonlinear PDE for the allowance price, the properties of which will be investigated. The gained knowledge will be used for a real options approach for the valuation of a power plant which takes into account the costs for the allowance certificates. The difference in value to the case, when no emission certificates are involved can be interpreted as the abatement costs for the emissions.

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