European Congress on Computational Methods in Applied Sciences and Engineering ECCOMAS 2004 P. Neittaanmäki, T. Rossi, K. Majava, and O. Pironneau (eds.) V. Capasso and W. Jäger (assoc. eds.) Jyväskylä, 24—28 July 2004 1 CO 2 EMISSIONS TRADING OPTIMIZATION IN COMBINED HEAT AND POWER GENERATION Aiying Rong 1 , Henri Hakonen 1 , Simo Makkonen 2 , Otso Ojanen2,and Risto Lahdelma 1 1 University of Turku, Department of Information Technology Lemminkäisenkatu 14-18 A, 20520 Turku, FINLAND e-mail: aiying@it.utu.fi , henri.hakonen@kone.com , risto.lahdelma@cs.utu.fi 2 Process Vision Ltd., Melkonkatu 18, FIN-00210 Helsinki, FINLAND e-mails: simo.makkonen@processvision.fi , otso.ojanen@processvision.fi Key words: CO 2 , emissions trading, optimization, combined heat and power production, energy. Abstract. The EU emissions trading directive states that starting from year 2005, industrial activities that emit significant amounts of CO 2 must have a permit to do so. Such industries will be allocated allowances for certain amounts of green house gas emissions during each calendar year. The individual actors must not exceed their allowances or they must pay a penalty fee for excess emissions. However, the actors are permitted to trade allowances within the EU. The emissions trading affects most severely energy companies that use fossil fuels as primary energy sources. The immediate effect of emissions trading is to favor fuels that cause little or no CO 2 emissions, and to disfavor fuels that cause higher emissions. The price level of CO 2 allowances will vary dynamically based on whether the market believes that the overall CO 2 emissions will exceed or fall below the EU target. During each trading period, individual actors must try to estimate whether their CO 2 emissions will exceed or fall below their allowances, and determine whether they should buy or sell allowances and when they should do so. The actors may also try to affect their emissions by altering their fuel mix or by adjusting their production levels. We formulate the CO 2 emissions trading optimization of a combined heat and power producer as a multi-period stochastic optimization problem and solve the problem using a stochastic simulation and coordination technique. The proposed solution strategy achieves both good expected profit and worst-case profit.