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Optimal reduction and equilibrium carbon allowance price for the thermal power industry under China’s peak carbon emissions target

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  • Jiaojiao Sun

    (China University of Mining and Technology)

  • Feng Dong

    (China University of Mining and Technology)

Abstract

As the largest source of carbon emissions in China, the thermal power industry is the only emission-controlled industry in the first national carbon market compliance cycle. Its conversion to clean-energy generation technologies is also an important means of reducing CO2 emissions and achieving the carbon peak and carbon neutral commitments. This study used fractional Brownian motion to describe the energy-switching cost and constructed a stochastic optimization model on carbon allowance (CA) trading volume and emission-reduction strategy during compliance period with the Hurst exponent and volatility coefficient in the model estimated. We defined the optimal compliance cost of thermal power enterprises as the form of the unique solution of the Hamilton–Jacobi–Bellman equation by combining the dynamic optimization principle and the fractional Itô’s formula. In this manner, we obtained the models for optimal emission reduction and equilibrium CA price. Our numerical analysis revealed that, within a compliance period of 2021–2030, the optimal reductions and desired equilibrium prices of CAs changed concurrently, with an increasing trend annually in different peak-year scenarios. Furthermore, sensitivity analysis revealed that the energy price indirectly affected the equilibrium CA price by influencing the Hurst exponent, the depreciation rate positively impacted the CA price, and increasing the initial CA reduced the optimal reduction and the CA price. Our findings can be used to develop optimal emission-reduction strategies for thermal power enterprises and carbon pricing in the carbon market.

Suggested Citation

  • Jiaojiao Sun & Feng Dong, 2023. "Optimal reduction and equilibrium carbon allowance price for the thermal power industry under China’s peak carbon emissions target," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, December.
    • Handle: RePEc:spr:fininn:v:9:y:2023:i:1:d:10.1186_s40854-022-00410-0
    DOI: 10.1186/s40854-022-00410-0
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