Investment Decision-Making for China’s Green Methanol Projects Under Carbon Price Uncertainty: A Real Options Approach

Abstract

Green methanol is a key pathway for deep decarbonization of the chemical industry and for absorbing intermittent renewable power, yet its commercialization is hampered by high costs and is highly sensitive to the carbon price, to the pace of technology cost reduction, and to policy support. Since the traditional net present value (NPV) method ignores managerial flexibility, it risks undervaluing projects. This paper develops a real-options model for green methanol investments. We quantify unit carbon-abatement intensity by coupling Aspen Plus simulation with life-cycle assessment, grounding carbon revenue in process data. The carbon price follows a geometric Brownian motion calibrated to China’s market, and the deferral option is valued using three mutually consistent methods: a Boyle trinomial lattice, a closed-form solution, and least-squares Monte Carlo simulation. For a representative project, immediate investment yields a negative NPV of −16.5 billion CNY, whereas the option-inclusive value remains positive at 24.1 million CNY. The real-options threshold exceeds the NPV threshold by a factor of 3.5, driven by both carbon-price uncertainty and deterministic operating-cost declines. The pure uncertainty premium converges to 2.49. With a less than 2% probability of investment within ten years, the option value primarily functions as protection against irreversible commitment. The operating-cost decline rate—dominated by green hydrogen prices—is the main driver of investment timing. Finally, product and investment subsidies exhibit similar efficacy (within 16%) when evaluated at equal fiscal costs, highlighting nuanced implications for policy design.