As the world transitions toward a low-carbon economy, carbon markets have emerged as
critical tools in the fight against climate change. A carbon credit represents the right to emit—
or offset—one ton of carbon dioxide or its equivalent in greenhouse gases. These credits are
generated through initiatives such as renewable energy development, reforestation, and
carbon capture technologies, and are actively traded on global markets.
According to Carbon Market Watch, Shell was the largest purchaser in the voluntary carbon
market in 2024, retiring approximately 14.9 million carbon credits, with more than half used in
December alone. This was nearly three times the volume of Microsoft, the second-largest
buyer. Other major buyers in the oil and gas sector included Eni (6 million credits), Engie (2.1
million), Woodside Energy (1.4 million), and PetroChina (1.2 million), each using carbon credits
as part of their broader climate strategies. These real-world practices highlight the increasing
reliance on carbon credits, while raising important questions about their credibility,
transparency, and environmental effectiveness.
This iRisk Lab project investigates financial modeling techniques to better understand and
manage carbon-related assets. Specifically, we develop a pricing framework for carbon options,
where the underlying asset is a carbon futures contract based on carbon credits, modeled
under a stochastic volatility process. Our approach is grounded in the methodology proposed
by Zhe Liu and Yanbin Li (2025), Carbon Option Pricing and Carbon Management under
Uncertain Finance Theory, published in Communications in Statistics – Theory and Methods. If
time permits, we analyze the carbon credit asset market further.
Supervisor: Tolulope Fadina
Graduate Supervisor: Yasintorn Wongwoottisaroch