Optimizing energy efficiency investments in steel firms: A real options model considering carbon trading and tax cuts during challenging economic conditions

This study proposes a policy mix of carbon pricing and tax cuts to incentivize firms to invest in energy-efficient technology during economic downturns and periods of low carbon prices. Utilizing a real options model, we determine the optimal timing for companies to make investments in energy efficiency technology, taking into account economic changes, carbon prices, and tax cuts. Our case study in China demonstrates that neglecting adverse economic conditions leads to an underestimation of the investment threshold and option value. We find that tax cuts, implemented within the emissions trading system, serve as an effective tool to encourage steel firms to invest in energy efficiency technology in the short to medium term. This supports carbon mitigation efforts, particularly during challenging economic situations. The flexibility of the model allows for analysis of energy efficiency technology in diverse firms and countries, as parameters can be adjusted to suit individual requirements.