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Optimal production planning and cap setting under cap-and-trade regulation

Ping He (), Guowei Dou () and Wei Zhang ()
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Ping He: South China University of Technology
Guowei Dou: Shenzhen University
Wei Zhang: Zhejiang University

Journal of the Operational Research Society, 2017, vol. 68, issue 9, 1094-1105

Abstract: Abstract This paper investigates the optimal production decisions of a self-pricing manufacturer and the optimal cap-setting decisions of a regulator under the cap-and-trade regulation. The objectives of the manufacturer and the regulator are to maximize profit and to maximize social welfare, respectively. We first derive the optimal production decisions and the corresponding total emissions of the manufacturer, with given parameters of the cap-and-trade regulation. Based on these results, we then solve the optimal cap-setting problem of the regulator. Furthermore, through sensitive analyses, we show that as the emissions intensity (i.e., the emissions generated from one unit of product) increases, both the optimal total emissions and the optimal cap first increase and then decrease.

Keywords: cap-and-trade; production; pricing; emissions intensity; Stackelberg game (search for similar items in EconPapers)
Date: 2017
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