Using a Real‐Options Approach to Model Technology Adoption Under Carbon Price Uncertainty: An Application to the Australian Electricity Generation Sector*

Abstract

The present climate for investment in electricity generation assets in Australia is uncertain. We develop a real‐options model to contrast the timing of the uptake of various electricity generation technologies under two carbon tax simulations: when a carbon tax of known size commences at a certain date in the future; and a carbon tax of known size commences at an uncertain date in the future. We find that uptake in the future varies significantly depending upon an investor's view of uncertainty and whether the technology is primarily designed to be viable in a market with or without carbon taxes.