Quantitative Models in Carbon Emission Market

Abstract

To meet the commitments of Kyoto protocol, three trading mechanisms are designed to reduce carbon emissions at low social costs. In these mandatory markets, emission allowance and related financial derivatives can be traded among polluting companies and speculators. Pricing the allowance is the fundamental quantitative problem in emission market and the optimal control models can achieve this objective. A novel regulatory policy is also elaborated for the policy makers that a combination of cap-and-trade scheme and tax/subsidy scheme will benefit the emission market both in economy and environment. Furthermore, numerical applications of our models to the rising Chinese emission market are established to assess the performance of the newly founded market and to give suggestions accordingly. Finally, European options in EU ETS and Asian options in CDM are evaluated for the policy makers to better combating the environmental problems.