Abstract
The article presents a quantitative approach to evaluating the saving and carbon emissions reduction resulting from the replacement of old residential furnaces with more efficient models. Natural gas prices are considered to follow a mean-reverting process and are discretized based on the Hull-White trinomial tree model. A dynamic programming approach is used to determine the saving for homeowners and the government, and to estimate carbon emissions reduction. Sensitivity analyses with respect to uncertainty in average monthly gas consumption, risk-free rate, and old furnace efficiency are also presented. Results show that upgrading household furnaces will reduce Canada's greenhouse gas emissions by 14.54 tons per household and will generate a saving per household of up to $1335 for homeowners and $2178 for the government.
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