Mean-risk optimal decision of a steel company under emission control

Abstract

We propose a mean-risk decision model for a steel company facing emission limits and trading with emission allowances. The model is calibrated using data of a real-life steel company and is subsequently solved for five different scenarios of demand and different levels of risk aversion. It is found that while the limits are never reached, permit trading influences the decision to a great extent, especially given extremely low or extremely high demand, i.e., when large amounts of permits need to be traded. We demonstrate that the risk caused by emission trading may increase not only with an increasing demand but also when the demand is low and a great amount of allowances must be sold.