Economic and environmental costs of regulatory uncertainty for coal-fired power plants

Uncertainty about the extent and timing of CO2 emissions regulations for the electricity-generating sector exacerbates the difficulty of selecting investment strategies for retrofitting or alternatively replacing existent coal-fired power plants. This may result in inefficient investments imposing economic and environmental costs to society. In this paper, we construct a multiperiod decision model with an embedded multistage stochastic dynamic program minimizing the expected total costs of plant operation, installations, and pollution allowances. We use the model to forecast optimal sequential investment decisions of a power plant operator with and without uncertainty about future CO2 allowance prices. The comparison of the two cases demonstrates that uncertainty on future CO2 emissions regulations might cause significant economic costs and higher air emissions.