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Implications of a cap‐and‐trade system for emission reductions under an asymmetric duopoly

Zi-rui Chen and Pu-yan Nie

Business Strategy and the Environment, 2020, vol. 29, issue 8, 3135-3145

Abstract: Climate change is a global problem causing wide concern and requiring workable solutions. The cap‐and‐trade system is recommended as a workable mechanism to reduce the emissions of enterprises and a popular policy affecting production and the environment. This article considers market power and studies the effects of a cap‐and‐trade system on the performance of companies and environmental protection under an asymmetric duopoly. A two‐step model was established to analyze the outputs, prices, and emission under the cap‐and‐trade system. The result indicates that the cap‐and‐trade system has significant implications for cleaner production. More precisely, the optimal emission cap is feasible with the function of social welfare. Both a low emission cap and high emission trading price are beneficial for promoting the development of sustainability. Moreover, the market value of the cap‐and‐trade system offers a huge incentive to companies emitting carbon dioxide. In particular, inefficient firms have a greater stimulus than efficient ones to reduce emissions to economize the cost of production. In summary, the cap‐and‐trade system makes a great contribution to the development of smart business.

Date: 2020
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