Sustainable Development Economic Strategy Model for Reducing Carbon Emission by Using Real Options Approach

Abstract

This paper is aimed at the call of the United Nations Intergovernmental Panel on Climate Change (IPCC) for the need to maintain global warming within a controllable range. The goal is to target carbon emissions to achieve “net-zero” emissions, along with constructing a green energy investment strategy model for firms in response to government’s environmental protection policies. The paper uses the real options approach of dynamic investment decision to construct an investment decision model. Considerations include government taxation of carbon emissions, subsidies to reduce carbon emission policies, and incentives for firms to renew their investments in green energy equipment. Assuming that there is uncertainty in government carbon emission taxes and a reduction of carbon emission subsidies, the changes follow the joint geometric Brownian movement. We used this model to solve the optimum of the threshold for carbon emission taxes and of carbon emission reduction subsidies ratio. If carbon emission taxes and carbon emission reduction subsidies ratio are higher than the threshold, a firm suspends investment in green energy equipment because government subsidies are insufficient. If carbon emission taxes and the carbon emission reduction-subsidy ratio are less than or equal to the threshold, then a firm is qualified for the government’s subsidies for reducing carbon emissions, and the firm invests in green energy equipment. The results of this study can provide reference for firms to invest in green energy equipment, and for government control of carbon emission policies. This policy can effectively reduce carbon emissions and achieve co-construction, co-governance, and the sharing of innovative social governance patterns. Finally, it can create a win–win situation between the government, firms, and society.