Modelling Multiperiod Carbon Markets Using Singular Forward-Backward SDEs

We introduce a model for the evolution of emissions and price allowances in carbon market, such as European Union Emissions Trading System (EU ETS). The accounts multiple trading periods, or phases, with times at which compliance can occur. At end each period, participating firms must surrender their made during that additional be used following periods. show multiperiod allowance pricing problem is well-posed various mechanisms (such banking, borrowing, withdrawal allowances) linking results are based on analysis forward-backward stochastic differential equation coupled forward backward components, discontinuous terminal condition, component degenerate. also an infinite-period market sequence no date. that, under appropriate conditions, value function converges, number periods increases, to this functions unique. Finally, we present numerical example demonstrates empirically convergence problem. Funding: Engineering Physical Sciences Research Council Climate-KIC funded all parts H. Chotai’s PhD programme centre doctoral training provided many opportunities travel conferences events programme. D. Crisan received financial support from École Polytechnique Université Paris Diderot through visitor grants.