Nash equilibria in greenhouse gas offset credit markets

Liam Welsh and Sebastian Jaimungal

Journal of Commodity Markets, 2024, vol. 35, issue C

Abstract: One approach to reducing greenhouse gas (GHG) emissions is to incentivise carbon capturing and carbon reducing projects while simultaneously penalising excess GHG output. In this work, we present a novel market framework and characterise the optimal behaviour of GHG offset credit (OC) market participants in both single-player and two-player settings. The single player setting is posed as an optimal stopping and control problem, while the two-player setting is posed as optimal stopping and mixed-Nash equilibria problem. We demonstrate the importance of acting optimally using numerical solutions and Monte Carlo simulations and explore the differences between the homogeneous and heterogeneous players. In both settings, we find that market participants benefit from optimal OC trading and OC generation.

Keywords: Optimal stopping; Stochastic control; Carbon and emissions markets; Offset credits; Game theory; Numerical methods (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:35:y:2024:i:c:s2405851324000382

DOI: 10.1016/j.jcomm.2024.100419

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