2023 Australasian Actuarial Education and Research Symposium

Ryan Dai

UNSW

Pricing carbon emission permits under the cap-and-trade policy with uncertainty

This is joint work with Henry Lam, Qihe Tang

Government policies are generally considered the most powerful and efficient tools for climate mitigation. In this paper, we explore a cap-and-trade framework in which the total amount of carbon emissions is limited by a government-imposed cap. We determine the carbon price through a competitive trading market involving both green and brown sectors. To achieve this, we develop a dynamic stochastic general equilibrium model in which energy input serves as a proxy for integrating carbon emissions into the production process. We calculate the optimal carbon price by examining the social planner's problem from a top-down perspective and the sectors' maximization problems from a bottom-up perspective, respectively. Risk aversion and uncertainty are incorporated to ensure the robustness of our results.