Critical price of sulphur dioxide emission allowances by

Abstract: The paper presents a decision-making model of envi-ronmental modernization in a power plant. The goal of the model is to analyse strategies implemented by power producers trying to com-ply with environmental regulations. Detailed analysis is related to the sulphur dioxide emission. Tradable emission allowances might be a new economic tool in fighting environmental problems in Poland. The model applies the real options approach. The approach is ap-propriate to model investments that are irreversible and an investor can afford to wait rather than invest immediately. The model as-sumes price uncertainty. The investment rule takes the form of a critical value optimal for immediate investment. The critical value of the project is calculated using dynamic programming. The project value follows a geometric Brownian motion. The results presented demonstrate that it is possible to calculate a critical price of emission allowances