Optimal pricing of the Taiwan carbon trading market based on a demand–supply model

Abstract

This study establishes theoretical models of supply and demand for carbon trading and proposes conditions for optimal trading prices and periods. Taiwan’s carbon market is used to verify the validity of the models. Simulations and empirical analysis position firms that emit greenhouse gases as the market buyers, and landowners that convert agricultural lands into plantation forests as the market sellers. The study compares four trading scenarios to determine optimal trading prices and time periods. There were four key conclusions. First, the higher the buyer’s cost to reduce carbon emissions, the higher the demand price is in the carbon trading market. The longer the trading period, the higher the carbon offsets, and the higher the demand price is for emissions trading. Second, the higher the emission trading price, the longer the optimal forest rotation period is for landowners. If emission costs do not exist at the time of logging, landowners are encouraged to log early, reducing the length of rotation periods. Furthermore, as the extension period in the trading scenarios increases, landowners’ costs increase, raising the market equilibrium price. Third, when landowners participate in forest carbon trading mechanisms or carbon subsidy policies, they may not always lengthen forest rotation periods. Therefore, if and when the government implements these mechanisms or policies, it should consider the factors affecting the length of forest rotation period. Finally, to respond to international interest in reducing greenhouse gas emissions, the government should design separate carbon programs and trading mechanisms for different types of private landowners. This would strengthen incentives for participating in the afforestation program.