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Carbon option pricing using uncertain differential equation

Author

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  • Liu, Zhe
  • Li, Yanbin

Abstract

In order to curb the trend of climate change, carbon emission rights are issued to limit the carbon emissions of enterprises. Due to the uncertainty of carbon emission rights demand and the high volatility of carbon price dynamics, it is of great significance for enterprises with high carbon consumption to manage carbon assets. For this purpose, carbon financial derivatives such as carbon options are developing rapidly, which help investors manage returns and risks effectively. Traditionally, stochastic differential equations based on probability theory are used for carbon option pricing. Sometimes, due to unexpected events and limited cognitive abilities of decision-makers, probability theory becomes invalid since its prerequisite, namely frequency stability, cannot be met. Fortunately, uncertainty theory enables to cope with these situations, thus uncertain differential equations are first used to evaluate carbon options in this work. Based on the value prediction and analysis of carbon option, decision making and strategy design for carbon asset management are achieved. Furthermore, it provides a detailed schema and an inspiring case study.

Suggested Citation

  • Liu, Zhe & Li, Yanbin, 2025. "Carbon option pricing using uncertain differential equation," Energy, Elsevier, vol. 320(C).
    • Handle: RePEc:eee:energy:v:320:y:2025:i:c:s0360544225009624
    DOI: 10.1016/j.energy.2025.135320
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    References listed on IDEAS

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    2. Di Gao & Bingqing Wu & Chengmei Wei & Hao Yue & Jian Zhang & Zhe Liu, 2025. "Carbon Price Prediction and Risk Assessment Considering Energy Prices Based on Uncertain Differential Equations," Mathematics, MDPI, vol. 13(17), pages 1-14, September.

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