EconPapers    
Economics at your fingertips  
 

The effect of production- versus consumption-based emission tax under demand uncertainty

Jie Ren, Xi Chen and Jian Hu

International Journal of Production Economics, 2020, vol. 219, issue C, 82-98

Abstract: Emission tax is an instrument widely adopted by countries and regions to incentivize emission abatement by emission-intensive firms including manufacturers. However, policies differ in how they allocate emission responsibilities among stakeholders. For example, the Chile emission tax directly penalizes manufacturers for the emissions they generate during their production (production-based emission tax), whereas the Sweden electricity emission tax penalizes the consumption of electricity rather than its production (consumption-based emission tax). These two methods have potentially varying implications on manufacturers' profits, their emission abatement decisions, as well as the resulting emission levels, especially when demand uncertainty is involved. In this paper, we investigate the impact of the two distinct methods by studying a profit-maximizing manufacturer facing stochastic demand. Under either production- or consumption-based emission tax, the manufacturer's optimal decisions on its selling price, production quantity and emission abatement investment are derived. Perhaps surprisingly, we show that under either tax, it is possible for an increase in the emission tax to discourage the manufacturer from investing in emission abatement. The impact of tax rate, abatement technology efficiency, and demand uncertainty on the manufacturer's profitability and abatement decision are also studied. Interestingly, higher demand uncertainty may motivate the manufacturer to invest more in emission abatement under production-based emission tax. Using a numerical example of an electricity power generator, we offer further insights into the comparison between the two taxes and find that there exist cases for either tax to dominate the other in terms of both profit and emissions.

Keywords: Emission tax; Green technology; Emission abatement; Sustainability; Newsvendor model (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0925527319301847
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:219:y:2020:i:c:p:82-98

DOI: 10.1016/j.ijpe.2019.05.009

Access Statistics for this article

International Journal of Production Economics is currently edited by R. W. Grubbström

More articles in International Journal of Production Economics from Elsevier
Bibliographic data for series maintained by Haili He ().

 
Page updated 2020-08-29
Handle: RePEc:eee:proeco:v:219:y:2020:i:c:p:82-98