Robust Emission Reduction Strategies under Cap-and-Trade and Demand Uncertainty

Chaonan Li, Tianyi Guo and Yan Chen ()
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Chaonan Li: Department of Decision Sciences, Macau University of Science and Technology, Macau, China
Tianyi Guo: Department of Decision Sciences, Macau University of Science and Technology, Macau, China
Yan Chen: Department of Decision Sciences, Macau University of Science and Technology, Macau, China

Sustainability, 2022, vol. 14, issue 20, 1-27

Abstract: In this study, we consider robust emission reduction strategies for a monopolistic manufacturer facing demand uncertainty under governments’ cap-and-trade regulations. We model the manufacturer’s decision making and associated profits under four different emission reduction strategies: no mitigation measure, undertaking remanufacturing, improving the greening level, and both remanufacturing and improving the greening level. We find that the cap-and-trade regulation enhances the manufacturer’s motivation to be engaged in reducing carbon emissions. Furthermore, the manufacturer’s optimal choice of emissions reduction strategy depends on the level of carbon trading price and the degree of demand uncertainty. Specifically, there exists a threshold of carbon trading price at which the manufacturer’s optimal emissions reduction strategy will change. When the carbon trading price is low (below the threshold), the best strategy for the manufacturer to reduce emissions is to improve the greening level of the products. When the carbon trading price is high (above the threshold), the manufacturer should consider both remanufacturing and improving the greening level. Moreover, the threshold of the carbon trading price is further impacted by the demand uncertainty. With market demand uncertainty rising, the threshold of carbon trading price increases as well. Finally, we find raising the carbon trading price may not necessarily benefit the environment. Overpriced carbon trading may hurt the manufacturer’s production instead of encouraging them to take emission reduction measures.

Keywords: cap-and-trade; remanufacturing; greening level; green technology innovation; emission reduction strategies (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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