Quantitative Sustainable Economics and Finance 
Time: 11.00 am
Date: 22th of May 2025
Room 3001

Benoît CHEVALIER-ROIGNANT (EM Lyon) “The effect of carbon prices on economic growth and decarbonization efforts”

Abstract :The introduction of carbon emission allowances was intended to affect firms’ investment decisions (with a possible adverse effect on “economic growth”) and allow the emergence and adoption of greener production technologies by incentivizing decarbonization efforts by firms. Empirical studies have stressed the impact of carbon prices’ uncertainty on firms’ decarbonization efforts. Using a stylized model in continuous time, our model studies when a firm should start operations given that production will imply carbon emissions and, so, the need to acquire certificates. This firm may also choose a production technology with a reduced carbon footprint (e.g., thanks to carbon capture) at the time of investment. In this context, the firm’s investment decision is driven by its beliefs about the idiosyncratic profitability and the magnitude of carbon prices. This investment can be reduced to a two-dimensional optimal stopping problem. We characterize the structure of the optimal strategy and design an algorithm to price this real option following a study of a `penalized equation.’ We also provide comparative statics with respect to key parameters.

Organizers:  Patricia Crifo, Emmanuel Gobet, Peter Tankov, Gauthier Vermandel, and Olivier David Zerbib

Sponsors:
CREST-CMAP