Game—A Carbon Emissions Game

Abstract

This paper describes a carbon trading game to be played in a classroom setting. The game is modeled on real-world electric power markets with a carbon dioxide (CO2) emissions cap, often referred to as a “cap-and-trade” system. Players assume the roles of competing utilities, each with a fossil fuel plant and a renewable energy plant. Any electricity generated by fossil fuel requires offsetting carbon credits, which are available via auction. Depending on the auction price, it can be cheaper or more expensive to generate electricity with fossil fuel versus renewables. The goals of the game are: for students to become acquainted with cap-and-trade markets; to understand how regulatory policy applied to a market can induce environmental benefits; to discover how to mathematically derive strategies; to get a taste of basic game theory, auctions, and the newsvendor problem; and to meet these objectives in a fun setting. While fairly straightforward and simplified to provide symmetry among student competitors, the game can lead to surprisingly interesting results. This paper describes the game and how to facilitate it, presents strategies, analyzes games that were played, introduces novel quantitative measures to evaluate the quality of game play, and offers a number of suggestions for extending the game. The online appendices are available at https://doi.org/10.1287/ited.2017.0171 . The teaching note is available at https://www.informs.org/Publications/Subscribe/Access-Restricted-Materials .