Optimal Carbon Emission Control With Allowances Purchasing

Abstract

In this paper, we consider a company can simultaneously reduce its emissions and buy carbon allowances at any time. We establish an optimal control model involving two stochastic processes with two control variables, which is a singular control problem. This model can then be converted into a Hamilton-Jacobi-Bellman (HJB) equation, which is a two-dimensional variational equality with gradient barrier, so that the free boundary is a surface. We prove the existence and uniqueness of the solution. Finally, some numerical results are shown.