| Title |
Using the Binomial Option Pricing Model for Strategic Sales of CER's to Improve the Economic Feasibility of CDM projects |
| Authors |
Koo, Bonsang ; Park, Jong-Ho ; Kim, Cheong-Woon |
| DOI |
http://dx.doi.org/10.6106/KJCEM.2014.15.1.111 |
| Keywords |
CDM ; CER ; Real Options ; Binomial Option Pricing Model ; Investment Analysis |
| Abstract |
The Clean Development Mechanism (CDM) allows New & Renewable Energy projects to make additional income by selling CER's, which represent the amount of Green House Gases(GHG) that is reduced in the project. However, forward contracts used to hedge fluctuating market prices does not allow projects to sell CER's at a premium. As an alternate approach to maximize CER revenue, CER's are modeled as a 'real option', in which CER's are sold only above the desired sales price. Using the Binomial Option Pricing model, the resultant lattices are used to determine whether to sell, defer or abandon the option at individual nodes. Overlaying Pascal's Triangle on the lattices also enabled the calculation of the annual probabilities for deferring CER sales without incurring downside losses. Application to an actual Landfill Gas project showed increased overall NPV, and that CER sales could be deferred at a maximum of 2 years. The proposed framework allows transparency in the analysis and provides valuable and strategical information when making investment decisions related to CER sales of CDM projects. |