Nash Equilibria in Greenhouse Gas Offset Credit Markets

In response to the global climate crisis, governments worldwide are introducing legislation to reduce greenhouse gas (GHG) emissions to help mitigate environmental catastrophes. One method to encourage emission reductions is to incentivize carbon capturing and carbon reducing projects while simultaneously penalising excess GHG output. Firms that invest in such projects or reduce their emissions can receive offset credits (OCs) in return. They may then use OCs for regulatory purposes to offset emissions in a compliance period or trade them. Here, we present a novel market framework and characterise the optimal behaviour of GHG 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.