Optimization of the Low-Carbon Energy Transition Under Static and Adaptive Carbon Taxes via Markov Decision Processes

Abstract:

Many economists argue that a national carbon tax would be the most effective policy for incentivizing the development of low-carbon energy technologies. Yet existing models that measure the effects of a carbon tax only consider carbon taxes with fixed schedules. We propose a simple energy system transition model based on a finite-horizon Markov Decision Process (MDP) and use it to compare the carbon emissions reductions achieved by static versus adaptive carbon taxes. We find that in most cases, adaptive taxes achieve equivalent if not lower emissions trajectories while reducing the cost burden imposed by the carbon tax. However, the MDP optimization in our model adapted optimal policies to take advantage of the expected carbon tax adjustment, which sometimes resulted in the simulation missing its emissions targets.

Back to AI for Social Good event