LAUSR

Abstract In this paper, we explore and compare the carbon emission rights price (carbon price) floor and revenue floor support schemes’ incentive effects on coal-fired power plants’ carbon emission reduction investment, considering random fluctuations of on-grid electricity volume and carbon price. First, we present real option models of carbon emission reduction investment under the carbon price floor and revenue floor schemes. Then, we discuss the optimal implementation duration of these two schemes. Results show the following: (1) both the carbon price floor and revenue floor support schemes can incentivize coal-fired power plants to invest in carbon emission reduction; however, there is a critical initial carbon price (CICP). Only if the initial carbon price is higher than the critical value can the carbon price floor or revenue floor encourage coal-fired power plants to immediately invest in carbon emission reduction. (2) Compared with the carbon price floor, the revenue floor requires a higher CICP but relatively fewer floor subsidies. If the initial carbon price is lower than the CICP and the carbon reduction facilities’ operating costs are subsidized to ensure coal-fired power plants make the investment immediately, more subsidies are needed for the revenue floor policy than for the carbon price floor policy.