How to purchase carbon emission right optimally for energy-consuming enterprises? Analysis based on optimal stopping model

Abstract

Enterprises with a schedule of purchasing carbon emission rights might face great fluctuations in the price dynamic of carbon assets, thus need to seek the proper timing to establish their long position. However, carbon asset management is not simply a timing optimization of buying financial assets; it is always in line with the prediction of consumption, inventory, and demand of carbon emission rights. This paper models the decision-making of buying carbon emission rights based on an optimal stopping problem constructed in a Brownian environment. To solve this optimal stopping problem, a virtual terminal point technique is developed to obtain a closed-form expression of the stopping boundary. The application of this technique in practice is simulated by a case study. This paper contributes in the following aspects: (1) Theoretically, it integrates research on enterprise carbon asset operation management and investment in the carbon financial markets. (2) Practically, it provides a quantitative decision-making scheme for enterprises buying carbon emission rights. (3) Technically, it pioneers a new method of solving the optimal stopping problem which was previously unsolvable for closed-form solutions.