Abstract: Reducing carbon dioxide emissions is a national macro goal. To achieve this goal, carbon emission reduction of coal-fired power generation is considered to be crucial. Although the proportion of renewable energy generation is increasing, coal-fired power generation is still the main source and an important guarantee of electricity supply. Therefore, encouraging coal-fired power plants to invest in carbon emission reduction and reducing carbon emissions per unit power generation may be one of the feasible ways to achieve carbon emission reduction target and guarantee sufficient electricity supply.
Three Geometric Brownian motions are employed to characterize respectively the random fluctuation of carbon emission right price (carbon price), on grid power of coal-fired power plants and unit operation and maintenance cost of carbon emission reduction facilities, and a real option model of carbon emission reduction investment for coal-fired power plants considering carbon price floor is proposed in this paper. Based on the solution of the model, for a 600,000 kW coal-fired power unit, the effect of carbon price floor on the expected investment timing of carbon emission reduction is investigated applied with the numerical simulation whose parameter values come from references or technical data of the generator. Then the effect of the initial carbon price and the initial per unit operation and maintenance costs on incentive carbon price floor are discussed, whose result reveal the valid region of carbon price floor support scheme, and the advantages and disadvantages of carbon price floor support scheme with direct investment subsidies policy is compared.
The analysis results indicate that, (1) whether carbon price floor can motivate coal-fired power plants to make carbon emission reduction investment is related to the initial carbon price and the initial per unit carbon emission reduction costs. When the initial prices are within the valid region, the expected investment timing can be induced by adjusting carbon price floor. When the initial prices are above the supremum of the valid region, coal-fired power plants will make a carbon emission reduction investment even if there is no carbon price floor support scheme. However, they will not invest within a predetermined timing when the initial prices are below the infimum of the valid region. (2) Compared with direct investment subsidies policy, carbon price floor support scheme can significantly save subsidies funds. Moreover, the combination of direct investment subsidies and tax exemptions can not only save subsidies funds, but also provide more incentives for coal-fired power plants to invest in carbon emission reduction.

Key words: real option, carbon price floor, carbon emission reduction, coal-fired power generation