Real Options Analysis for “Green Trading”: The Case of Greenhouse Gases

Joseph Sarkis and Maurry Tamarkin

Engineering Economist, Vol. 50, No. 3, 2005.

To address the issue of reducing emissions of greenhouse gases, organizations are involved with emergent markets for trading emission permits. Investment in equipment that reduces emissions may generate emission credits for sale in the market. This paper applies real options analysis to actual case study information from British Petroleum-Amoco of a particular project that would generate emissions credits. We conclude that unless permits have a faster price rise than is generally anticipated, certain projects are not economically feasible. The policy implication is that planners may need to set more stringent regulations to bring about their desired result. Additionally, real option analysis in this market based regulatory policy is an especially important tool for the energy industry, which is disproportionately impacted by greenhouse gases policies.

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