Timing of Corporate Green Investment Under Policy Uncertainty: A Real Options Approach

Abstract

Changes in carbon pricing, environmental standards, green subsidies and technology policy complicate the timing of corporate green investment. This paper uses real options theory to explain how firms balance the value of retaining investment flexibility against the costs of delay. It provides a conceptual synthesis of published research, illustrated by renewable-energy remuneration reform in Spain and industrial electricity-levy relief in Germany. The analysis distinguishes changes in expected profitability from uncertainty about future returns. Uncertain support for installed assets may discourage investment, whereas a deadline for securing new-project subsidies can encourage earlier commitment. A credible increase in expected compliance costs may also favour earlier abatement when investment reduces those costs; greater volatility around the expected cost path can instead strengthen the incentive to wait. These effects depend on policy design, irreversibility, technological change and implementation lead times. The policy illustrations clarify these mechanisms without establishing their separate causal effects. Predictable review schedules, transparent eligibility rules and credible transition arrangements can reduce avoidable uncertainty while preserving scope for policy adaptation. Effective policy should therefore address both the level of investment incentives and the conditions governing their duration.