Optimal Abatement Schedules for Excess Carbon Emissions Towards a Net-Zero Target

TL;DR

This paper develops a stochastic control model to determine the optimal gradual reduction schedule of excess carbon emissions towards achieving net-zero, considering a dynamic carbon budget and constraints on emission rates.

Contribution

It introduces a novel stochastic control framework linking emission reduction strategies to optimal dividend problems with ratcheting constraints, providing analytical and numerical solutions.

Findings

Optimal emission reduction schedule derived

Non-increasing emission rate constraint impacts value function

Numerical illustrations demonstrate schedule effectiveness

Abstract

Achieving net-zero carbon emissions requires a transformation of energy systems, industrial processes, and consumption patterns. In particular, a transition towards that goal involves a gradual reduction of excess carbon emissions that are not essential for the well-functioning of society. In this paper we study this problem from a stochastic control perspective to identify the optimal gradual reduction of the emission rate, when an allocated excess carbon budget is used up over time. Assuming that updates of the available carbon budget follow a diffusion process, we identify the emission strategy that maximizes expected discounted emissions under the constraint of a non-increasing emission rate, with an additional term rewarding the amount of time for which the budget is not yet depleted. We establish a link of this topic to optimal dividend problems in insurance risk theory under ratcheting constraints and show that the value function is the unique viscosity solution of the associated Hamilton-Jacobi-Bellman equation. We provide numerical illustrations of the resulting optimal abatement schedule of emissions and a quantitative evaluation of the effect of the non-increasing rate constraint on the value function.