Evaluating coal bed methane investment in China based on a real options model

In this paper, a real options based binominal lattices model for the investment of coal bed methane (CBM) is conducted. CBM prices and market demand are incorporated into the model as the predominant uncertain factors and it is solved by using the bidimensional binominal lattices approach. Then the model is employed to evaluate the investment in CBM projects in China, and the effect of related policies is analyzed. The empirical results demonstrate that the model can be used to offer a better explanation of why the CBM industry has developed slowly in China from an investment perspective. It is found that the current policy environment is not positive enough to attract investment in the CBM industry. Among various factors, CBM prices yield the most significant effect on stimulating investment in CBM development. Increasing the price subsidy is also an effective policy to stimulate investment and promote the development of the CBM industry in China.

► A real options model for coal bed methane (CBM) investment in China is conducted.
► The model is solved based on the bidimensional binominal lattices approach.
► It offers a better explanation of why the CBM industry in China has developed slowly.
► Current investment policy environment is not favourable enough to attract investment.
► Policy mix including pricing reform can significantly stimulate investment in CBM industry.