Optimal Goods Production Subject to Emissions Trading with Price Floor

Ryle S. Perera ()
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Ryle S. Perera: School of Banking and Finance, UNSW Business School, University of New South Wales, Sydney, NSW 2052, Australia

International Game Theory Review (IGTR), 2024, vol. 26, issue 03, 1-23

Abstract: In this paper, we propose a novel approach to study the production of consumption goods within a price floor carbon emission trading scheme. A stochastic Stackelberg game is set up between the environment authority (Player 1), and the manufacturer/producer (Player 2). In such a hybrid emission trading scheme, the authority sets an emissions target and producers will choose to participate in carbon trading on this basis, subject to a stochastic demand with information delayed. When the stochastic demand is determined by the market sale price and the scale of carbon emission reduction, we apply the maximum principle to obtain both the optimal production and market price. We show when the demand is determined by both the market sales price and carbon emission reduction, manufacturers are persuaded to set the market sales price first (ex ante incentive) and then proceed to a carbon trading scheme, thus providing a backward-looking advantage to manufacturers. Consequently, the manufacturer and the environmental authority can find a subgame-perfect Nash equilibrium via backward induction.

Keywords: Game theory; decision analysis; newsvendor model; stochastic differential game; Stackelberg game (search for similar items in EconPapers)
JEL-codes: C70 C79 Q50 Q52 Q59 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S0219198924500038

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