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The impact of potential climate policy on the coal bed methane investment in China - a real option–based study

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In this paper, based on the real option theory, the impact of the potential climate policy on the coal bed methane (CBM) investment in China is assessed from the perspective of CBM investment under the uncertainties of future climate policy and CBM market price. The threshold values of the market and policy variables to promote CBM project investment are obtained. Firstly, incorporating the greenhouse gas (GHG) abatement benefits into CBM investment evaluation will increase the future cash flow of CBM investment, and promote CBM investment significantly. Secondly, the potential climate policy is an important supplement to the traditional CBM policies, and will change the threshold value of traditional CBM policy variables such as CBM price, subsidy and tax. Thirdly, the current low international carbon price is not sufficient to promote large–scale CBM investment, and the future GHG abatement policy should be stringent to improve carbon price. At last, the high uncertainty of future climate policy would probably be a barrier to the CBM investment with the consideration of the GHG abatement benefits. So some necessary measures may need to be taken to reduce the climate policy uncertainty.

Keywords: climate policy, coal bed methane, CBM investment, investment evaluation, real options, China, greenhouse gases, GHG abatement, carbon pricing, CBM subsidies, CBM prices, CBM taxes

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