Multi-stage stochastic optimization of carbon risk management

Result code in IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F67985556%3A_____%2F22%3A00557302" target="_blank" >RIV/67985556:_____/22:00557302 - isvavai.cz</a>

Alternative codes found

RIV/61989100:27510/22:10251388

Result on the web

<a href="https://www.sciencedirect.com/science/article/pii/S0957417422004389?via%3Dihub" target="_blank" >https://www.sciencedirect.com/science/article/pii/S0957417422004389?via%3Dihub</a>

DOI - Digital Object Identifier

<a href="http://dx.doi.org/10.1016/j.eswa.2022.117021" target="_blank" >10.1016/j.eswa.2022.117021</a>

Result language

angličtina

Original language name

Multi-stage stochastic optimization of carbon risk management

Original language description

Emissions trading within the Emissions Trading Scheme of the European Union (EU ETS) strongly influences European industrial companies. The companies must choose their strategy of reduction the costs of emissions allowances as possible. The changing system’s conditions and volatile prices of allowances make this decision challenging. The main aim of this study is to compare different ways of risk management: banking (i.e., buying the allowances in forward) and using derivatives: futures and options. Despite several studies devoted to the relationship between the EU ETS and companies have already been published, there is still a gap in this field. Namely, the published studies have been substantially simplified so far by ignoring the risk of driving parameters. We construct a realistic large-scale stochastic optimization model, which avoids the mentioned simplifications. We use the Markov Stochastic Dual Dynamic Programming algorithm (MSDDP) to find the optimal solution. We apply the model to the data of a real-life industrial company. We find that banking is the most costly way of risk reduction, while using derivatives is efficient in risk reduction. Surprisingly, out of the derivatives, it is always optimal to use futures and not to use options. These results are confirmed by a thorough sensitivity analysis. The preference of the futures over options is mainly due to the less price of futures in comparison to options reducing risk equivalently.

Czech name

—

Czech description

—

Type

J_imp - Article in a specialist periodical, which is included in the Web of Science database

CEP classification

—

OECD FORD branch

50204 - Business and management

Project

<a href="/en/project/GA21-07494S" target="_blank" >GA21-07494S: Efficiency of Carbon Reduction Policies</a><br>

Continuities

I - Institucionalni podpora na dlouhodoby koncepcni rozvoj vyzkumne organizace

Publication year

2022

Confidentiality

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Name of the periodical

Expert Systems With Applications

ISSN

0957-4174

e-ISSN

1873-6793

Volume of the periodical

201

Issue of the periodical within the volume

1

Country of publishing house

NL - THE KINGDOM OF THE NETHERLANDS

Number of pages

12

Pages from-to

117021

UT code for WoS article

000830169300004

EID of the result in the Scopus database

2-s2.0-85128573521