Simulation of carbon-dioxide emission by option model

Tamás Nagy ()
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Tamás Nagy: Corvinus University of Budapest Faculty of Environmental Economics and Technology Budapest Hungary

Society and Economy, 2011, vol. 33, issue 1, 219-236

Abstract: Estimation of carbon emissions is very important not just for companies but also for governments and policymakers. In this paper I provide an emission estimation model for an energy-producing company based on spot market prices. The company will produce energy and emit carbon-dioxide at a given point in time if its margin for emitted CO2 dominates the prices of emission rights. The estimated emissions at a given time point can be calculated as an option of related asset prices (electricity, gas, emission rights). The prices of underlying assets behave according to Geometric Brownian motion. The production decisions of the company and its emissions are modeled using a Monte Carlo framework. The resulting distribution is similar to the sum of autoregressive Bernoulli random numbers. For easier forecasting of expected cumulated emissions a logistic type emission function was fitted to the result of simulations.

Keywords: EU ETS; forecasting emission; simulation; real option (search for similar items in EconPapers)
JEL-codes: C53 D24 Q51 (search for similar items in EconPapers)
Date: 2011
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