1. Introduction
Proposed by the United Nations in 2018, the world is now at the most critical moment of climate change. This could lead to serious disasters to all of humanity and the entirety of the planet’s ecosystem. To keep global warming within a manageable range, carbon pricing is an important solution. The Intergovernmental Panel on Climate Change (IPCC) report states that net emissions must reach a “net-zero” status by 2050. The 2018 Nobel Prize in Economic Sciences was awarded to Professor William D. Nordhaus, who also proposed the concept of carbon pricing, and presented that the most effective way to solve the problem of greenhouse-gas emissions is to uniformly levy a carbon tax on all countries. Therefore, this paper studied the issue of carbon emission taxes and subsidies to reduce carbon emissions. When the government levies carbon emission taxes, the production costs of firms increase. Firms may pass on production costs to consumers and reduce social welfare. Therefore, the government should consider the issue of subsidies from a social-welfare perspective and reward carbon-reducing firms by encouraging firms to cooperate with governmental environmental-protection policies, fulfill social responsibilities, reduce carbon emissions, and invest in technological innovation by upgrading green energy equipment. Assuming that other conditions are unchanged, government carbon emission tax levies and carbon emission reduction subsidies are the main decision variables. We applied the real options approach evaluate the feasibility of technological innovation and upgrading green energy equipment investment projects for firms to save energy and reduce carbon emissions. Our results also provide government policies of optimally levying carbon emission taxes and carbon emission reduction subsidies.
The real options approach is essentially a strategic “investment or no investment”. The real options approach includes the options to defer development, abandon, expand or contract, extend or shorten, scope up or down, compound options, and rainbow options. It considers the time risk factor and the uncertainty of the future, and the decision maker has the ability to respond to the choice. Under this advantage, the real options approach evaluation project investment has become an important method for modern governments and firms [
1]. Traditional methods used for the feasibility evaluation of investment projects include the profitability index (PI), internal rate of return (IRR), payback period, accounting rate of return (ARR), and net present-value methods (NPV). However, in a complex and uncertain investment environment, managerial investment strategies should adopt a dynamic decision-analysis model. Among them, the real options approach is more responsive to a complex investment environment than a traditional NPV [
2,
3]. Hazra et al. [
4] pointed out that the value of mining is affected by uncertain parameter values. The traditional deterministic NPV method in many cases cannot provide the required solution because NPV does not consider uncertain parameters and dynamic properties. Real option valuation (ROV) is a more practical way to solve this problem. Trigeorgis and Reuer [
5] reviewed real options theory (ROT) in strategy. ROT can provide managers with the flexibility to deal with the relationship between competition and cooperation in an uncertain environment, and how ROT provides information for managers on key tensions between commitment and resilience, and between competition and cooperation. This theory proposes how to uniquely solve basic problems in the strategy. Smit and Trigeorgis [
6] integrated real options theory and game theory to propose a “strategic net present value” theory. Exploring the new value-assessment method that combines real options theory and game theory in an uncertain environment, such as with learning-experience effects, technical uncertainty, and proprietary-information interaction, the optimal choice is in the elastic strategy of waiting and execution. Providing a strategic NPV increases our understanding of conditions that are more relevant to NPV, real options or strategic thinking. Savolainen et al. [
7] used the real options approach to study the impact of financing conditions on management flexibility and project value. Liu and Wang [
8] developed a network-equilibrium model using real put-and-call option theory to study competitive supply-chain companies that could strategically invest in new supplier capabilities under uncertain cost and demand. Guj and Chandra [
9] pointed that using real options analysis approaches avoids the use of positive biases inherent in volatility estimates, which can aggregate the effects of all sources of uncertainty and, to some extent, avoid modeling complexity. Depending on the probability distribution of individual uncertain variables rather than a summary form of cash-flow fluctuations, a more accurate and often more conservative real option value is generated. Ko et al. [
10] used a compound binomial options method with management flexibility, considering that cyclical changes in the overall economy affect consumer purchasing power. Gross domestic product (GDP) represented by future economic growth is uncertain. Thinking about product-cycle characteristics, optimal investment strategy, and decision-making project and option values at each stage need to be evaluated. Dolan et al. [
11] recommended that the Brennan–Schwartz method be extended to real option valuation to address the issue of physical climate risks faced by companies for long-term investors, such as sovereign wealth funds. Delaney [
12] used the real options approach to derive a dynamic model that provides the best timing strategy for trading techniques. Huberts et al. [
13] adopted real options games, considering optimal timing and investment ability under the demand of random dynamic changes. They found that the incumbent invests earlier than the entrant, and that entry deterrence is achieved through timing rather than through overinvestment. Lawrence et al. [
14] studied the challenge of decision makers in coastal areas on how to cope with the effects of sustained and uncertain sea-level rise. Dynamic adaptive pathway planning (DAPP) and real options analysis can support decision makers in addressing irreducible uncertainties in coastal areas.
The real options approach applies to environmental pollution and investment to protect environmental issues. Lin et al. [
15] used the real options approach to construct a continuous environmental-pollution policy model to establish storage thresholds for contaminated storage and the best time to implement environmental-pollution policies. Liu et al. [
16] applied the real options approach to construct an optimal carbon-trading strategy model by applying clean-energy strategy with an optimal energy ratio under clean-energy policy of whether energy is not clean enough or excessively clean. Torani et al. [
17], focusing on the development of clean-energy technologies, used a stochastic dynamic model of the real options approach to explore changes in solar technology. After evaluating energy, electricity prices, innovation subsidies, carbon taxes, the optimal investment threshold, and the timing of firms when electricity prices and solar energy costs are uncertain, they proposed policy development as the main key factor. Moriarty and Palczewski [
18] used the real options approach to assess the value of power system reserve capacity for a limited period of time. Ansaripoor and Oliveira [
19] used the real options approach of management flexibility to construct models that calculate uncertain prices, fuel prices and consumption, and technological advances, and analyze how uncertain fuel prices and technological advances produce choices. Kim et al. [
20] studied the economic impact of climate change in Cambodia and determined the economics and feasibility of adaptation strategies such as irrigation and planting-date adjustments by using an investment model based on a real options framework. Providing an appropriate set of policy recommendations can lead to sustainable agricultural productivity and economic growth.
With regard to research on issues related to carbon emission tax and policy, Barbosa et al. [
21] developed an extended real options model that took into account some of the relevant macroeconomic factors that were not present in the relevant literature (namely, different types of taxes, asymmetric investment multipliers, and public inefficiencies). The best incentives for different types of stimuli were derived and discussed. They also showed that subsidy policies were always better than tax reductions. Pereira et al. [
22] used the dynamic general-equilibrium model to explore the impact of carbon taxes on Portugal. The results showed that carbon-tax revenues give back to lower tax burdens and improve energy efficiency. Whitford [
23] pointed out that a major impact of U.S. energy-price changes is political structural concerns about oil and gas markets and government support for energy efficiency. Voulis et al. [
24] explored the potential of energy taxes to provide incentives. Through measuring the difference in financial incentives between two tax designs (per-unit and ad valorem taxes) in a simulation case study of consumers’ heat pumps in the Netherlands, their outcomes showed that financial incentives were 3.5 times higher for the ad valorem tax than for the per-unit tax. They also recommended that energy-tax policy should be formulated to provide consumers with adequate financial incentives. Ma et al. [
25] pointed out that, with the rapid development of their economy, China’s power consumption has dramatically increased. They used structural analysis of input–output subsystem analysis in research to explore the sources of emission increases in China’s power industry from 2007 to 2015 and further assess the impact of power structures and carbon-tax collection. The research results showed that consumption is a major growth factor for CO
2 emissions. Most CO
2 emissions are driven by the continued expansion of large-scale infrastructure. Furthermore, carbon taxes and price policies may be an alternative to reducing CO
2 emissions. Zhang and Zhang [
26] studied the impact of GDP, trade structure, exchange rate, and FDI inflows on China’s carbon emissions from 1982 to 2016. They found that the Environmental Kuznets Curve (EKC) hypothesis is valid for China and, at the same time, affects service trade, that China’s carbon emission exchange rates are negative, and that the impact of FDI inflows is positive. Yun et al. [
27] explored effective technology-development strategies for solar companies facing technological turbulence (diversification and collaboration). This study found that the adoption of technology diversification and R and D cooperation strategies have a positive impact on business performance. This paper is mainly aimed at firms to improve their environmental responsibility, cooperate with government policies to strengthen environmental protection, and carry out innovative production technologies and pollution-reduction investment projects. Liu [
28] studied that, in low-carbon economic networks, governments and enterprises inevitably encounter some degree of mistrust because of the complexity and uncertainty of policies. Research results indicated that an open policy process, joint work, and information sharing are effective methods that reduce the level of distrust. In addition, specific low-carbon policies and low-carbon product standards need to be specifically formulated to reduce the corporate distrust of low-carbon policies. Bryant et al. [
29] pointed out that in the transition to renewable-energy, if there is no viable business model to support it, the best renewable technologies and policies decrease short of the transition necessary to develop a sustainable-energy sector.
Section 2 of this paper constructs a decision-making model for innovative energy-saving, carbon-reduction technologies, and equipment purchases under the assumption that the government levies carbon emission taxes and introduces carbon emission reduction subsidies in accordance with the joint geometric Brownian motion hypothesis.
Section 3 applies numerical-example and sensitivity analyses. Finally,
Section 4 is our conclusion.
4. Conclusions
The purpose of the paper was to promote a win–win strategy for governments, firms, and the natural environment under sustainable economic development. The paper was based on reviews of flexible policy management concerning how the government could effectively control environmental-protection issues of carbon emissions. In order to effectively control carbon emissions in the production process, governments levy a carbon tax on firms in order to prevent firms from passing on increased tax cost to consumers. Therefore, incentive firms actively invest in technological innovation and upgrading green energy equipment. When a government levies a carbon emission tax on firms, it also adopts subsidies for firms to invest in technological innovation and upgrading green energy equipment to reward firms that reduce carbon emissions. Therefore, the paper facilitates governments’ decisions to levy carbon emission taxes and subsidize the reduction of carbon emissions by creating an optimal decision-making model for firms to invest in technological innovation and upgrading green energy equipment.
The model mainly determines the best timing of firms’ investment in technological innovation and upgrading green energy equipment. In response to the government, CO2 net emissions must reach a “net-zero” state. Governments levy a carbon emission tax and subsidize the reduction of carbon emission policies to promote firms’ investment in technological innovation and upgrading green energy equipment. This paper assumed that government carbon emission tax levy per unit and carbon emission reduction subsidy per unit are uncertain variables, and their changes follow joint geometric Brownian motion. This paper used the real-option approach to construct a decision-making model for carbon emission policy formulation to derive optimal threshold for carbon emission tax per unit and carbon emission reduction subsidy per unit ratio. If governments levy carbon emission tax per unit and reduce carbon emission subsidy per unit ratio, is higher than . This indicates that government subsidies are insufficient for firms’ investment in reducing carbon emissions. Therefore, firms choose to suspend investment in technological innovation and upgrading green energy equipment, and wait for better investment opportunities. If is less than or equal to , firms choose to invest in technological innovation and upgrading green energy equipment. Based on numerical-example- and sensitivity-analysis results, the theoretical and practical implications of this study are as follows.
Numerical-example analysis showed that the reference value for optimal investment of technological innovation and upgrading green energy equipment is when optimal threshold . However, when is less than or equal to 0.91, firms should adopt a strategy of investing in technological innovation and upgrading green energy equipment to reduce carbon emissions. At the same time, it also showed that, when governments start to formulate carbon emission taxes, they should provide higher subsidies on reducing carbon emissions than carbon emission taxes, and further encourage firms to actively invest in technological innovation and upgrading green energy equipment. Sensitivity-analysis results showed that, when risk discount rate r rises, optimal threshold value also rises. However, when firms’ investment return rate r is increased, governments can increase carbon emission taxes or decrease subsidies to reduce carbon emissions when formulating policies. Moreover, when carbon emission taxes’ expected growth rate and expected growth rate of carbon emission subsidy increase, optimal threshold decreases. This indicates that governments need to provide more subsidies to reduce carbon emissions when imposing carbon emission taxes on firms. Additionally, when revenue of firms that have not considered carbon emission costs rises, optimal threshold also rises. Therefore, when the investment revenue of firms is raised, governments should adopt an increase of carbon emission taxes per unit . When revenue increases to a certain extent, optimal threshold is also changed from being less than 1 to greater than 1. That is, governments formulate carbon emission tax policies when per-unit carbon emission taxes are greater than per-unit carbon emission subsidies. As such, optimal threshold increases as carbon emissions decrease after firms invest in technological innovation and upgrading green energy equipment. From a government’s perspective, firms that fail to meet the “net-zero” target should be given higher subsidies in order to promote firms investing in technological innovation and upgrading green energy equipment as soon as possible. The results of this study can provide reference for firms to invest in technological innovation and upgrading green energy equipment, governments to control emission policies, and, in turn, to achieve innovative social-governance patterns of co-construction, co-governance, and sharing, which creates a win–win situation between governments, firms, and society.
This study limits the main research from a financial point of view. This paper assumed that government carbon emission tax levy per unit and carbon emission reduction subsidy per unit are uncertain variables, and their changes follow joint geometric Brownian motion, and only used subsidies to promote firms investing in technological innovation and upgrading green energy equipment. Our recommendations for future research directions are: (1) changes of government carbon emission tax levy per unit and carbon emission reduction subsidy per unit are subject to various random processes according to the actual situation, such as the Poisson process; (2) variables in the model can be expanded to being multivariate; (3) ways to promote investment in technological innovation and upgrading green energy production equipment can be promoted by education, regulation, and other aspects.