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How to purchase carbon emission right optimally for energy-consuming enterprises? Analysis based on optimal stopping model

Author

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  • Liu, Yue
  • Sun, Huaping
  • Meng, Bo
  • Jin, Shunlin
  • Chen, Bin

Abstract

Enterprises with a schedule of purchasing carbon emission rights might face great fluctuations in the price dynamic of carbon assets, thus need to seek the proper timing to establish their long position. However, carbon asset management is not simply a timing optimization of buying financial assets; it is always in line with the prediction of consumption, inventory, and demand of carbon emission rights. This paper models the decision-making of buying carbon emission rights based on an optimal stopping problem constructed in a Brownian environment. To solve this optimal stopping problem, a virtual terminal point technique is developed to obtain a closed-form expression of the stopping boundary. The application of this technique in practice is simulated by a case study. This paper contributes in the following aspects: (1) Theoretically, it integrates research on enterprise carbon asset operation management and investment in the carbon financial markets. (2) Practically, it provides a quantitative decision-making scheme for enterprises buying carbon emission rights. (3) Technically, it pioneers a new method of solving the optimal stopping problem which was previously unsolvable for closed-form solutions.

Suggested Citation

  • Liu, Yue & Sun, Huaping & Meng, Bo & Jin, Shunlin & Chen, Bin, 2023. "How to purchase carbon emission right optimally for energy-consuming enterprises? Analysis based on optimal stopping model," Energy Economics, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:eneeco:v:124:y:2023:i:c:s0140988323002566
    DOI: 10.1016/j.eneco.2023.106758
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    Cited by:

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    3. Welsh, Liam & Jaimungal, Sebastian, 2024. "Nash equilibria in greenhouse gas offset credit markets," Journal of Commodity Markets, Elsevier, vol. 35(C).
    4. Shi, Shouyuan & Yu, Tao & Lan, Chaofan & Pan, Zhenning, 2024. "Estimating the actual emission cost in an annual compliance cycle: Synergistic generation and carbon trading optimization for price-taking generation companies," Applied Energy, Elsevier, vol. 376(PA).

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    More about this item

    Keywords

    Carbon asset; Thermal power; Emission reduction decision; Optimal stopping;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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