On the decision of chlor-alkali process retrofit under environmental uncertainty: A real options approach

Abstract

Increasing concerns over the release of mercury into the environment call for a cleaner production process in the chlor-alkali industry. Conventional discounted cash flow (DCF) appraisal does not account for the inherent strategic value of the project. Based on real optiontheory, this paper develops an evaluation model for estimating the threshold and timing that trigger a process retrofit project under environmental uncertainty. After conducting numerical and sensitivity analyses on significant factors that affect corporate process retrofit behavior, we have demonstrated that in the current environment and under current regulations, there are insufficient incentives to encourage firms to retrofit the mercury cell process, other than a significant increase in the environmental costs and/or strict enforcement of the current environmental policy. For a process that persistently emits toxic pollutants, it would be hoped that companies took a more socially responsible approach when considering the option of a process retrofdit.