Mechanism design problems in carbon economics

Radhika Arava, Y Narahari, Deepak Bagchi, P Suresh, S V Subrahmanya


Reduction of carbon emissions is of paramount importance in the context of global warming and climate change. Countries and global companies are now engaged in understanding systematic ways of solving carbon economics problems, aimed ultimately at achieving well defined emission targets. This paper proposes mechanism design as an approach to solving carbon economics problems. The paper first introduces carbon economics issues in the world today and next focuses on carbon economics problems facing global industries. The paper identifies four problems faced by global industries: carbon credit allocation (CCA), carbon credit buying (CCB), carbon credit selling (CCS), and carbon credit exchange (CCE). It is argued that these problems are best addressed as mechanism design problems. The discipline of mechanism design is founded on game theory and is concerned with settings where a social planner faces the problem of aggregating the announced preferences of multiple agents into a collective decision, when the actual preferences are not known publicly. The paper provides an overview of mechanism design and presents the challenges involved in designing mechanisms with desirable properties. To illustrate the application of mechanism design in carbon economics, the paper describes in detail one specific problem, the carbon credit allocation problem.


Carbon economics; carbon trading; carbon markets; cap and trade; carbon credits; Carbon Credit Allocation; game theory; mechanism design; optimization; incentive compatibility; Allocative Efficiency; Individual Rationality.

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