Nash Equilibria in Greenhouse Gas Offset Credit Markets

TL;DR

This paper introduces a new market framework for GHG offset credits, analyzing optimal strategies for participants in single and two-player settings using control theory and game theory, supported by numerical simulations.

Contribution

It presents a novel market model for GHG offset credits and characterizes optimal behaviors using control and game theory in both single and multi-player scenarios.

Findings

Optimal OC trading benefits market participants

Numerical solutions demonstrate the importance of acting optimally

Differences observed between homogeneous and heterogeneous players

Abstract

One approach to reducing greenhouse gas (GHG) emissions is to incentivize 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.