(356h) A Game-Theoretic Approach for Peer-to-Peer Carbon Emission Trading on the Blockchain

A competitive, fair, accountable, and transparently accessible emission trading system (ETS) is critical in reducing greenhouse gas (GHG) emissions from the chemical, petrochemical, and manufacturing sectors, where they are significant contributors, accounting for approximately 37% of total GHG emissions [1]. Failing to limit global warming to 1.5°C may lead to an increase in costs and challenges in adapting to climate change impacts such as extreme weather events, sea-level rise, loss of biodiversity, and negative effects on food security and economic growth [2]. To tackle these issues, a price on carbon emissions is an effective approach, which can be achieved through either carbon tax or cap-and-trade ETS. This approach has been widely adopted by many countries and regions worldwide, including the European Union Emissions Trading System (EU ETS) and the Regional Greenhouse Gas Initiative (RGGI) in the United States. However, traditional ETS has faced several challenges, such as difficulties in carbon credit allocation, determining purchase quantities, and trading fairly. Moreover, it lacks effective participant willingness for emission amount verification, transparent monitoring and reporting, identifying a realistic cap limit for each sector, and accounting for the actual cost of emission reduction efforts, such as those associated with carbon capture technology [3].

In this research, we propose a game-theoretic framework to find mutually beneficial ways for peer-to-peer carbon management within the industrial ecosystem using nonconvex bilevel programming. We integrate this developed game-theoretic approach into blockchain technology through smart contracts to make it possible to use shared data for strategic planning for carbon trading in a unique transparent, and reliable way. Game theory can help model and analyze the strategic interactions between the stakeholders (firms, governments, and individual traders), such as how they will respond to changes in the carbon price, how they will compete for allowances, how they will try to influence the market rules, and whether trading is fair. On the other hand, blockchain technology, with its underlying characteristics such as anonymity, decentralized integrity, immutability, latency, security, traceability, and transparency, offers a potential solution to the limitations of the current ETS, including transparency, standardization, interoperability, and transaction costs. Along the way, we use the idea of minimum disequilibrium as a solution concept that reduces to traditional equilibrium when equilibrium exists [4], and implemented a smart contract on Ethereum blockchain through our proposed conceptual framework. The results of our simulations show that our proposed system will work to cut carbon emissions while keeping the market competitive. It can be used as a starting point for putting a similar peer-to-peer trading system based on game theory on blockchain systems in other industries, such as trading in renewable energy, automated trading of raw materials and chemicals, common utility management, managing supply chains sustainably, and running energy grids economically.

References:

1. Hasan MMF, Zantye MS, Kazi M-K: Challenges and opportunities in carbon capture, utilization and storage: A process systems engineering perspective. Computers & Chemical Engineering 2022, 166:107925.
2. Matthews HD, Wynes S: Current global efforts are insufficient to limit warming to 1.5°C. Science 2022, 376:1404-1409.
3. Al Sadawi A, Madani B, Saboor S, Ndiaye M, Abu-Lebdeh G: A comprehensive hierarchical blockchain system for carbon emission trading utilizing blockchain of things and smart contract. Technological Forecasting and Social Change 2021, 173.
4. Harwood S, Trespalacios F, Papageorgiou D, Furman K: Equilibrium modeling and solution approaches inspired by nonconvex bilevel programming. arXiv preprint arXiv:2107.01286 2021.