Real Options Conference 2023

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Forecasting Carbon Prices

According to projections the number of emission mitigation facilities that should be up and running presently should be an order of magnitude of what we have today. Many researchers and experts have attributed this failure to the unattractive value. Often carbon emission mitigation measures fall short of their effectiveness. We think this is due to a lack of informed understanding of the future of this commodity. In this study, we develop forecasts of carbon allowance prices based on the two-factor stochastic model of (Schwartz & Smith, 2000). We implement the analytical framework in Jafarizadeh (2022) using the Distribution of Sum Discounted Prices technique to determine a pessimistic, an expected, and an optimistic forecast. We use the forecasted prices in an example of economic valuation of a project incorporating decision analysis to determine the best course of action for the project.

Ibrahim Kadafur
Heriot Watt University
United Kingdom


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