Optimal Timing of Carbon-Capture Retrofit on a Mature Offshore Gas Platform under Stochastic EU-ETS Prices and a Stochastic Decommissioning Deadline
A real-options analysis with a free-boundary HJB and a closed-form perpetual benchmark
We study the optimal timing of a carbon-capture-and-storage retrofit on a mature offshore gas platform whose operator faces a stochastic EU Emissions Trading System price and a stochastic regulatory decommissioning deadline. The retrofit converts an uncovered emitter into a low-emission asset at an irreversible lump-sum cost; the decision-maker maximises expected discounted post-retrofit cash flow net of the retrofit outlay over the residual platform life. We formulate the problem as an optimal-stopping problem with a two-state Markovian driver (EUA price under geometric Brownian motion, deadline under an exponential-intensity hazard) and derive the associated Hamilton-Jacobi-Bellman free-boundary problem. A closed-form solution is obtained for the perpetual-deadline benchmark; the finite-horizon case is solved numerically by an upwind finite-difference scheme on a non-uniform grid. We characterise the exercise boundary as a function of the deadline hazard, calibrate the model to 2018–2023 EUA price data, and uncover a counterintuitive policy result. The deadline lever, deployed in isolation, *suppresses* rather than accelerates retrofit, because a shorter expected residual platform life shrinks the post-retrofit cash-flow stream faster than it shrinks the option value of waiting. At the calibrated baseline, doubling the deadline hazard from 1/12 yr⁻¹ to 1/6 yr⁻¹ raises the retrofit threshold past 500 €/tCO₂, effectively eliminating retrofit at any realistic EUA price. The implication for EU-ETS reform is that the deadline lever must be deployed jointly with an instrument that raises the post-retrofit cash-flow stream — a binding EUA price floor or a per-tonne CCS capex subsidy. The framework extends to abandonment, repurposing, and sequential CCS module addition with minor structural changes.