We study optimal behavior of energy producers under a CO2 emission abatement program. The single-agent case leads to an optimal switching problem similar to the one considered in Carmona and Ludkovski (2008).
In this talk I will focus on the two-agent model where each agent is optimizing her emission and production schedules and the game-theoretic aspect is captured through a reduced-form price-impact model for the CO2 permit price. Such duopolistic competition results in a new type of a nonzero-sum stochastic switching game. The question of existence of Nash equilibria is addressed through generalization to randomized switching strategies. No uniqueness is possible and we therefore consider a variety of correlated equilibrium mechanisms. A simulation-based algorithm to solve for the game values is constructed and we present a preliminary numerical example.
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