Decision analysis with green awareness and demand uncertainties under the option-available ETS system

Abstract

Besides the emission trading scheme (ETS), a mandatory measure to reduce carbon emission, the increasing green awareness encourages the manufacturing industry to invest in green upgrades for reducing its emission. Under the increasingly stringent low-carbon environment, the manufacturer needs to restructure its production by holding emission reserves or investing in greener production. Relatively few research works have discussed how the risk-bearing manufacturer performs in consideration of the emission options to achieve low-carbon production, although its contributions to the long-run success of ETS have been proven. This paper fills this research gap by combining the method of Lagrange Multipliers and Karush-Kuhn-Tucker (KKT) conditions to obtain production optimality under emission constraints. Although this method is famous in economics, it has rarely been used in emission reduction. The objective of this research is to investigate the emission and production strategy with green awareness under an emission-limited market, where emission options are available and uncertainties exist. Analytical and numerical results show that emission options make scheduling production beyond the emission cap beneficial under almost all the conditions. Specifically, the firm may gain under reasonable emission restrictions than under emission-free market. Setting reasonable emission caps helps the manufacturer achieve higher profitability and larger emission reduction, out of the green-inclined demand and low-carbon restrictions. This helps reduce resistance to the emission reduction regulations and encourages the manufacturer to join in low-carbon production.