Stochastic carbon taxes and capital turnover: A real options model for decarbonization investment

• Develops a real options model under carbon tax uncertainty • Incorporates stochastic costs and Poisson carbon policy regime shifts • Higher tax credits accelerate low-carbon adoption • Carbon tax uncertainty delays replacement and raises emissions • Derives optimal technology replacement thresholds and timing rule This paper examines how uncertainty in carbon tax regimes affects technology investment decisions in energy-intensive supply chains. Conventional discounted cash flow approaches fail to capture the stochastic nature of policy variability, particularly regarding dynamic elements such as corporate tax rates, carbon investment tax credits, and carbon tax depreciation schemes that influence replacement timing. To address this limitation, a stochastic replacement model (VTR-SRM) is developed within a real options framework. The model integrates equivalent annual cost and stochastic salvage value dynamics to determine optimal technology replacement under regulatory uncertainty. A numerical case study illustrates the framework, modeling anticipated policy shifts through a Poisson process. The results show that carbon tax design significantly affects the critical replacement threshold and may, under certain conditions, induce earlier investment. Taken together, the proposed framework enables the evaluation of optimal investment timing under evolving decarbonization policies, offering strategic insights into how carbon tax structures shape technology transitions for both firms and policymakers.