Management of Carbon Emissions via a Nonzero-Sum Stochastic Differential Game

Ryle S. Perera and Kimitoshi Sato
Additional contact information
Ryle S. Perera: School of Banking and Finance, UNSW Business School, University of New South Wales, Sydney, NSW 2052, Australia
Kimitoshi Sato: ��Department of Industrial Engineering and Management, Faculty of Engineering, Kanagawa University, Yokohama, Kanagawa 221-8686, Japan

International Game Theory Review (IGTR), 2025, vol. 27, issue 01, 1-35

Abstract: This study examines an environmental management strategy to effectively cap greenhouse gas (GHG) emissions in an electricity market. To do so, we model a stochastic impulse two-person, nonzero-sum game between a power plant, a representative of electricity production within a country whose primary aim is to maximize profits, and government who is motivated to minimize the social and environmental cost of pollution. We assume that the power plant’s competitive price is equal to the marginal cost whilst the government’s running cost is linear. When the uncontrolled output of GHG emissions evolves as a Geometric Brownian motion, we provide a more dynamic and robust depiction of the interplay between government and the energy sector. We provide solutions to the impulse control problem derived via the quasi-variational inequalities (QVIs). We then present a sufficiency criterion for the existence of a Nash equilibrium for the optimal policy. Ultimately, our use of short-run price competition characterized by strategic supplies for renewable and fossil resources and inclusion of endogenous constraints on production capacity provides a more robust model and an effective framework for the development of policy that allows governments to meet emissions targets whilst guaranteeing energy supply.

Keywords: Diffusion process; government intervention; GHG emission; impulse control; stochastic impulse nonzero-sum game (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219198924500191
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:igtrxx:v:27:y:2025:i:01:n:s0219198924500191

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219198924500191

Access Statistics for this article

International Game Theory Review (IGTR) is currently edited by David W K Yeung

More articles in International Game Theory Review (IGTR) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().