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1870. Equilibrium Carbon Permit Supply and CCS Investment under Uncertainty

Invited abstract in session MC-33: Dynamics of the Firm II, stream Optimal Control Theory and Applications.

Monday, 12:30-14:00
Room: 42 (building: 303A)

Authors (first author is the speaker)

1. Nicola Comincioli
University of Brescia and Fondazione Eni Enrico Mattei
2. Peter Kort
Tilburg University
3. Jacco Thijssen
Management School & Department of Mathematics, University of York
4. Sergio Vergalli
Economics and Management, University of Brescia and Fondazione Eni Enrico Mattei

Abstract

This paper examines the optimal behavior of carbon-intensive companies operating under the European Union Emission Trading System (EU ETS), wherein they are obligated to purchase emission permits on the secondary market if their emissions exceed their allowance. Specifically, we consider the scenario where these companies, typically required to procure permits at market prices, are endowed with the (real) option to invest in Carbon Capture and Storage (CCS) technology to mitigate their emissions and, thus, permit expenditures. The central challenge is the determination of the optimal time for investment in CCS within a stochastic framework characterized by uncertainty in EU ETS permit prices. To enhance realism, we address the problem for a heterogeneous group of companies distinguished by their respective costs of implementing CCS systems, reflecting varying degrees of environmental consciousness across industrial sectors. Furthermore, we incorporate an increasing floor for permit prices to mirror policy efforts aimed at promoting green transition by elevating emission costs. We solve this problem analytically and through numerical simulations calibrated with real market data. In addition to offering insights into individual company behaviors, the findings can inform decision-makers in refining environmental policies, particularly regarding the management of permits price floor and its potential to expedite the green transition.

Keywords

Status: accepted

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