Environmental regulation and clean-energy technologies: A transition-incentive framework for thermal power systems under sustainable insurance

This article develops an integrated transition-incentive framework to examine how clean-energy technologies, environmental regulation, and electricity-market design jointly shape financing conditions and asset values in thermal power systems. Using a contingent-claim approach, the framework links a thermal power producer operating under carbon pricing with a fund-providing insurer as a representative channel of transition finance. Regulated electricity prices and emissions caps interact with efficiency-enhancing technologies—biomass cofiring, combined heat and power, and carbon capture—to influence cash-flow risk, default thresholds, and investment incentives. The results show that efficiency improvements and predictable electricity pricing stabilize operating cash flows, reduce exposure to carbon-price volatility, and strengthen plant asset values, whereas more stringent emissions caps raise transition risk when not accompanied by complementary support mechanisms. Overall, the findings underscore the importance of coordinating carbon regulation, electricity-market design, and transition-finance instruments to enable an orderly and financially resilient low-carbon transition.