Impact of Firms’ Observation Network on the Carbon Market

Abstract

Given the important role of the carbon market in fighting against global warming, the impact of information on the efficiency of the scheme is a critical issue for both its designers and the central authority. At least two aspects of information are worthy of attention. First is the incompleteness of information, with which the firms make decisions to minimize their abatement cost and maximize their profit. Second is the mechanism of information transmission. Based on an agent-based framework we established in our previous work, we explicitly depicted the first aspect and analysed its impact on firms’ decision-making and consequent market results. In this paper, we focus on the second aspect, transmission mechanism of information, which is depicted as an observation network among firms. The basis in reality is that the firms in the carbon market are usually from different industries or areas, and it is relatively easier to observe the conditions of firms from the same industry or area, corresponding to neighbours in the network. Four scenarios are considered, including no network, regular network, random network, and small-world network. We find that the existence of an observation network has a significant influence on the market results.

Keywords

• carbon market
• agent-based model
• incomplete information
• observation network