The Korean Journal of Economic Studies
Real Option Analysis for the Effect of Linkage between the Korea’s Emission Trading Scheme and the Green Pricing
Jaehyung Lee (SK Telecom)Year 2020Vol. 68No. 2
AbstractThe government introduced the Renewable Energy Use Guarantees Systemto support the firms considering to adapt in RE100, and conducted pilotprojects for the ‘green pricing’ as a means of implementing the RE100. Noagreement has been reached on the linkage between the Emission TradingScheme (ETS) and the green pricing, but if linked, it will have a positiveeffect in terms of increasing the greenhouse gas (GHG) reduction option offirms. The ETS and the green pricing are different climate policies, but fromthe perspective of allocating entities, the reduction cost for indirect emissionand green premium must be paid in double. Therefore, allocating entities mayrecognize this as ‘overlapping regulation’ As a way to solve this problem, alinkage between the two policies is proposed, and the policy effect of the firmaccording to the policy linkage is analyzed. I applied the real option approachto analyze investment decisions under uncertainty and derived the optimalinvestment threshold under the uncertainty of emissions allowance price. Inaddition, the green premium, where optimal investment threshold and theallowance spot price are equal, varies according to the greenhouse gasemission characteristics of the firm.