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Real Options Conference 2023

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The Two Factor Process For Forecasting Carbon Prices

Most carbon capture and storage projects do not pass the economic feasibility studies. Often this is because their benefits are small due to unattractive value of carbon emission mitigation measures. We believe one reason that such measures are currently unattractive is due to a lack of informed understanding of the future of this commodity. To address this issue, we conducted a study to develop forecasts of carbon allowance prices based on the two-factor stochastic model of Schwartz and Smith (2000). We implemented the analytical framework described in Jafarizadeh (2022a, 2022b) using the Distribution of Sum Discounted Prices technique. The analysis led to informed forecasts of pessimistic, expected, and optimistic carbon prices. We further used these forecasts in economic analysis of a carbon storage project.

Ibrahim Kadafur
Heriot Watt University
United Kingdom


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