Carbon price prediction based on multiple decomposition and XGBoost algorithm

Abstract

Carbon trading is an effective way to limit global carbon dioxide emissions. The carbon pricing mechanisms play an essential role in the decision of the market participants and policymakers. This study proposes a carbon price prediction model, multi-decomposition-XGBOOST, which is based on sample entropy and a new multiple decomposition algorithm. The main steps of the proposed model are as follows: (1) decompose the price series into multiple intrinsic mode functions (IMFs) by using complete ensemble empirical mode decomposition with adaptive noise (CEEMDAN); (2) decompose the IMF with the highest sample entropy by variational mode decomposition (VMD); (3) select and recombine some IMFs based on their sample entropy, and then perform another round of decomposition via CEEMDAN; (4) predict IMFs by XGBoost model and sum up the prediction results. The model has exhibited reliable predictive performance in both the highly fluctuating Beijing carbon market and the comparatively stable Hubei carbon market. The proposed model in Beijing carbon market achieves improvements of 30.437%, 44.543%, and 42.895% in RMSE, MAE, and MAPE, when compared to the single XGBoost models. Similarly, in Hubei carbon market, the RMSE, MAE, and MAPE based on multi-decomposition-XGBOOST model decreased by 28.504%, 39.356%, and 39.394%. The findings indicate that the proposed model has better predictive performance for both volatile and stable carbon prices.

Keywords: CEEMDAN; Carbon price prediction; Decomposition with integration; Multiple decomposition algorithm; Sample Entropy; XGBoost.