The model should include the following modules:

• Domestic Industry: Each industry produces products which require quotas as input. Can trade with domestic or foreign owners of carbon quotas according to rules set as parameter from the psySpec file.
• Foreign Industry: Each foreign industry produces products which require quotas as input. Can trade with other foreign industry or domestic industry according to rules set as parameter from the psySpec file.
• Double auction market for carbon quotas: Intermediate for trading carbon quotas.
• NOTE: for the new model we only have a generic type of industries. They have a “country” parameter that can be used to establish to whom they can sell or not. For this version of the simulation the market will allow every industries to trade with every other ones.

Each industry has a profit function for each period:

Profit = (Revenues pr. unit – Cost pr. unit ) * Number of units sold – Fixed costs.

Fixed costs and revenues pr. unit are fixed but depend on industry. Production capacity is fixed during the simulation. Demand is set for the whole simulation (e.g. kept constant).

Cost pr. unit is calculated in the following way:

Cost pr. unit = Cost of inputs + Carbon release pr. unit * Cost of Carbon

Cost of inputs and carbon release pr. unit is specific for the industry but fixed for the whole simulation (we might want to change carbon release pr. unit in each industry to reflect technology development). Industry is not allowed to produce units unless it has quota for it. Cost of Carbon is the average price paid for carbon owned.

Industry will place bids for quota if shortage is anticipated. Shortage is anticipated if:

• Demand for quota during what is left of allocation period is more than quota owned.
• Demand is extrapolated from number of units sold in the previous period (constant till the end of allocation period).

Max bid price is set to the cost of carbon which gives zero profit based on number of units and revenues from the previous period. Actual bid price is adjusted to the market, i.e. transaction price in the last period and sucess in buying. Quantity is set equal to shortage.

Industry will place asks for quota if excess is anticipated. Excess is anticipated if:

• Demand for quota during what is left of allocation period is more than quota owned.
• Demand is extrapolated from number of units sold in the last period (constant till the end of allocation period).

Min ask price is set to average price of carbon owned. Actual ask price is adjusted to market, i.e. transaction price in the last period and success in selling. Quantity is set equal to excess. Average price of carbon owned takes into account both buying and selling of quotas.

The following should be monitored for each industry in each period:

• Profits in each period.
• Carbon used.
• Average price of carbon owned.
• Units of carbon owned.
• Overview of selling and buying of quotas, both orders and trades (time, quantity, price)

A double auction is a process in which buyers and sellers can freely enter limit orders (bids or asks) and accept bids or asks entered by others. It is the organization used in major exchange markets around the world trading stocks, commodities or currencies.

Use the following specifications when designing the market:

• There are 0 ≤ i ≤ N buyers and 0 ≤ j ≤ M sellers in the market.
• For each time period each buyer (i) is assigned a value, 0 ≤ vbi ≤ maxBuyerValue which represents how the buyer (i) values the commodity. Similarly, each seller (j) is assigned a value, 0 ≤ vsj ≤ maxSellerValue which represents how the seller values the commodity.
• For each time period each buyer (i) is assigned a demand for Di units and each seller (j) assigned a supply of Sj units.
• During the time period let each buyer (i) place a bid for Di units at the price of vbi. Similarly, let each seller (j) place an ask for Sj units at the price of vsj.
• A trade will be made when a seller asks for a price which is equal to or lower than the price bid by the buyer. When the ask price is lower than the bid the transaction price is set equal to the one arriving earlier. Parts of an order can be traded leaving the rest untraded.
• The auctioneer will seek to maximize the number of trades for the bids and asks available during the period.

Use the following information to monitor the results during each time period:

• Plot of the transaction prices for each trade as well as average price, standard deviation of the price, and volume of trade.
• Plot demand and supply curve for based on the values of the buyers and sellers (quantity on x-axis, price on y-axis). The demand and supply curve determines the equilibrium price and volume, which should be compared to the actual transaction prices, average transaction price of the run, and the volume traded within the run.

The simulation should run for a single allocation period (e.g. 2011-2020). The smallest time period should be one week.

Starting conditions should be set to approximate real life conditions. Carbon release pr unit should be used to adjust scales across different industries. The industries we want to use are:

• Domestic: Heavy industry, road transport, air transport, agriculture, fishing.
• Foreign: Power generation, road transport, air transport, agriculture, fishing.

Following variables should be used to evaluate and compare different simulation.

• Accumualted profits of domestic industries (separately and together)
• Accumulated profits of foreign industries (separately and together)
• Accumulated use of carbon in domestic industries (separately and together)
• Accumulated use of carbon in foreign industries (separately and together)
• Accumulated buying and buying of quotas in domestic industries (quantity, average price)
• Accumulated selling and buying of quotas in foreign industries (quantity, average price)

Different simulations should be performed for all combination of government rules for trade for different quantities of freely allocated quotas.