Duan Wei, Zhang Wenhui, Li Changqing and Xu Desheng.A System Dynamics Approach to the Impact of Carbon Policies on Indirect Coal Liquefaction Projects: A Case Study for China. Dynamic Systems and Applications 29 (2020) No. 6, 2219 – 2250

https://doi.org/10.46719/dsa20202965

ABSTRACT.
Indirect coal liquefaction projects would solve China’s energy supply problems. However, indirect coal liquefaction projects create high levels of carbon dioxide emissions. What are the impacts of carbon policies on indirect coal liquefaction projects? Indirect coal liquefaction projects require substantial resources, are technically complex, have strong asset specificity, high uncertainty regarding future profits, intense competition, are environmentally challenging, and have complex implicit project value. The analysis methods applied to other industry carbon policies cannot fully adapt to indirect coal projects. This article uses system dynamics and real options game theory to build a new carbon policy effect analysis framework for indirect coal liquefaction projects. We run base, price, base-carbon tax, base-emissions limits, price-carbon tax, and price-emissions limits. The results show that the effect of carbon tax policy on indirect coal liquefaction projects is influenced by energy market price fluctuations, and carbon emissions limit policies have a substantial impact on projects. Therefore, governments should be cautious when using carbon emissions limits policy. Additionally, policy makers in shaping carbon tax policy must consider the energy market price fluctuations in the future. This analytical framework and the conclusions can be applied to other industries of complex projects on carbon policy effects.

Keywords:system dynamics, indirect coal liquefaction, carbon policies, scenario analysis.