Optimization on emission permit trading and green technology implementation under cap-and-trade scheme

More and more countries and regions have turned to the cap-and-trade scheme to control carbon emissions. Proper planning of emission permit trading and green technology implementation is beneficial for a generating company to achieve its emission targets at the lowest possible cost. In this paper, a multistage mixed-integer nonlinear programming model is formulated to help make these decisions, which minimizes the total cost of green technology investment, emission permit trading and holding. Differing from previous research, this model captures the characteristics associated with green technology, notably its implementation lasting as a project for several periods and investment cost declining over time due to technology maturation. The holding cost of emission permits as a new operational resource under the cap-and-trade scheme and auto-regression of the carbon price are also considered in the proposed model. The analytical results suggest the optimal trading period and the trading amount of emission permit as well as the starting period for implementing green technology. It is found that the optimal trading period has nothing to do with initial emission permit quota allocated by regulator. In addition, whether or not to invest in green technology is determined by balancing the investment cost and its resulting benefit of reduced emission. Higher carbon price and unit holding cost of emission permit will incent the generating companies implement green technology. The analysis results also illustrate the specific regions in which cleaner/dirtier green technology will be selected or none of them will be considered. Finally, numerical examples validate the analytical results. (C) 2018 Elsevier Ltd. All rights reserved.