Carbon Pricing under Competition and Regulation in the Extraction Industry

25 Pages Posted: 6 Sep 2023

See all articles by Moustapha Pemy

Moustapha Pemy

Towson University

Bruno Kamdem

New York University, Tandon School of Engineering:; Lepton Actuarial & Consulting, LLC ; John Hopkins University, Whiting School of Engineering

Hélyette Geman

University of London - Economics, Mathematics and Statistics

Date Written: September 6, 2023

Abstract

Metals and minerals are critical in the construction of solar panels, batteries and electric vehicles. However, the emissions produced through extraction must be controlled and monitored. The goal of the paper is twofold: a) First establish a unique Nash equilibrium in the context of N producers of a commodity that creates emissions in the extraction process and a regulator who has established a cap-and-trade mechanism for these emissions. b) Then extend the problem to a multi-economy setting in which miners and oil companies operate in several regions where they face several types of regulations, such as the Cross Border Mechanism (CBAM) which became effective in Europe in May 2023. Accordingly, we study the EU-traded carbon instruments which are fairly liquid at this moment and propose a two-factor model that is calibrated to traded carbon Futures and options. Our claim is that, as explained by Damon et al. (2019) grandfathering gives today too much advantage to the first emitters at the expenses of new entrants, while the cap- and-trade mechanism, using Carbon Permits for instance, cannot be easily extended to a global economy. Carbon Derivatives, instead, provide a classical and efficient way to complete the emissions market.

Keywords: CO2 Emissions; Cap-and-trade; Nash Equilibrium; Carbon Derivatives

JEL Classification: C72, G12, H21, Q54

Suggested Citation

Pemy, Moustapha and Kamdem, Bruno and Geman, Helyette, Carbon Pricing under Competition and Regulation in the Extraction Industry (September 6, 2023). Available at SSRN: https://ssrn.com/abstract=4564079 or http://dx.doi.org/10.2139/ssrn.4564079

Moustapha Pemy

Towson University ( email )

8000 York Road, ST 100A
Towson, MD 21204
United States

Bruno Kamdem (Contact Author)

New York University, Tandon School of Engineering: ( email )

Department of Finance and Risk Engineering
1 Metrotech Center, Room 1012
Brooklyn, NY 11201
United States
4435540016 (Phone)

Lepton Actuarial & Consulting, LLC ( email )

515 Madison Ave
8th Floor
New York, NY 10022
(646) 314-1748 (Phone)

HOME PAGE: http://www.leptonactuarial.com

John Hopkins University, Whiting School of Engineering ( email )

Department of Applied Mathematics and Statistics
3400 North Charles Street
Baltimore, MD 21218
United States

Helyette Geman

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom

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