The Optimal Carbon Emission Reduction and Prices with Cap and Trade Mechanism and Competition

Linghong Zhang, Hao Zhou, Yanyan Liu and Rui Lu
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Linghong Zhang: Management Science and Engineering Postdoctoral Mobile Station, Shandong Normal University, Ji’nan 250014, China
Hao Zhou: Business School, Shandong Normal University, Ji’nan 250014, China
Yanyan Liu: Business School, Shandong Normal University, Ji’nan 250014, China
Rui Lu: School of Economics and Management, Hangzhou Normal University, Hangzhou 311121, China

IJERPH, 2018, vol. 15, issue 11, 1-23

Abstract: More and more countries employ the Carbon Cap and Trade mechanism (CCT-mechanism) to stimulate the manufacturer to produce much more eco-friendly products. In this paper, we study how the CCT-mechanism affects competitive manufacturers’ product design and pricing strategies. Assume that there are two competitive manufacturers; we give the optimal closed form solutions of the carbon emission reduction rates and retail prices in the Nash game model and the Stackelberg game model with CCT-mechanism, respectively. Additionally, we also discuss the impacts of CCT-mechanism, consumer environmental awareness (CEA), and the sensitivity of switchovers toward price on the optimal carbon emission reduction rates, retail prices, and manufacturers’ profits. We find that (i) when the carbon quota is not enough, there is a trade off between investing in producing much greener product and purchasing carbon quota; when the carbon price is not high, the manufacturer tends to purchase the carbon quota; and when the carbon price is much higher, the manufacturer is more willing to increase the environmental quality of the product; (ii) manufacturer’s size affects product’s emission reduction rate and manufacturer’s optimal profit; larger manufacturer tends to produce much greener product, but it does not mean that he could obtain much more money than the small manufacturer; and (iii) the decision sequence changes manufacturer’s strategies; the optimal emission reduction rate in Nash and Stackelberg game models are almost the same, but the differences of prices and profits between Nash and Stackelberg model’s are much bigger.

Keywords: Carbon cap and trade mechanism; carbon emission reduction; manufacturer size; consumer environment awareness; competition (search for similar items in EconPapers)
JEL-codes: I I1 I3 Q Q5 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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