Carbon Trading, The Game

At our company Christmas party this year we played Carbon Trading, The Game. Bascially, I devised a simple cap and trade game in a power sector, and then we played out four rounds to see what happened. The results were an interesting summary of how small rules can have big impacts in the outcome. And perhaps a good Christmas lesson to everyone involved in carbon market design. The good news, the market in our game came in well under its caps even in the early round.

Basic rules were as follows:

Players start with a certain amount of cash, and then each round bid for different types of power plants, fuel, and carbon credits each round (there were shortages of each), then run their plants (assuming they were able to acquire power plants, adequate fuel, and adequate carbon credits to operate). In our simple cap and trade model, the cap was based initially off of a coal plant’s emission factor, and declined on a per plant basis each year. Power was priced at a flat $100/MWH (makes the math simple). The winner was the one with the most cash after converting carbon to cash at the market clearing price in the last round.

The idea was that the declining cap and fuel shortage would lead to players bidding high for low emissions hydro and wind farms to get under their cap, and lead to reductions.

A few interesting outcomes. Wind and hydro plants did command premium prices, but not all the way to pricing carbon in (probably since no one was sure what then final carbon price would be – proving uncertainty wins again). And since we did not let power prices float, nor require a must run component, fuel prices went on a wild swing but eventually fell as at least two players opted for a strategy to essentially mothball plants and instead just bank the carbon credits, and buy a few more. As a result, carbon prices also stayed low in the early rounds, since fewer operating plants were hitting their caps – however, the players who has stockpiled carbon then bid up the price of the final credit of the final round to $70 instead of the $10-$20 in previous rounds (it only stopped there because they ran out of money).

The final result, that high price of carbon in round 4 meant the winning strategy ended up being buy cheap coal plants throughout the game, run them only when fuel and carbon were very cheap, and make your money off the carbon.

I am planning on revising the rules for better play, then releasing an actual carbon trading game in the near future.

Besides operating CleantechBlog.com, Neal Dikeman is a partner at cleantech merchant bank Jane Capital Partners LLC, CEO of Carbonflow, Inc., and Chariman of Cleantech.org.

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