January  2017, 13(1): 251-265. doi: 10.3934/jimo.2016015

Influences of carbon emission abatement on firms' production policy based on newsboy model

School of Humanities and Economic Management, China University of Geosciences (Beijing), 29#, Xueyuan Rd., Beijing, China, 100083

* Corresponding author: Dayi He

Received  December 2014 Revised  September 2015 Published  March 2016

Fund Project: The research is funded by the Fundamental Research Funds for the Central Universities (2-9-2015-033).

Carbon emission allowance(CEA) has been becoming an important factor for firms to make production policies. Cap-and-trade system is fulfilling in many countries and regions as a market scheme promoted by many politicians and economists for its efficiency in resources assignment and promotion to abatement of carbon emission. More and more firms take CEA into their production plan which makes them confronted with influences from two markets, product market and CEA trade market in the meanwhile. Based on the Newsboy model for simplicity, and with assumption that demand of product is a stochastic variable, this paper establishes optimization models to get the optimal production policy under administrative scheme (command-and-control) and market scheme (cap-and-trade) respectively. By comparing the firms' production policy and expected net income(ENI) with or without the existence of CEA trade market, it is found that CEA trade market can reduce the optimal amount of production and carbon emission on the one hand, and it does not decrease firms' ENI on the another hand because the CEA trade market provides more options for firms to make production policy. Hence, in the proposed complete and perfect market, we concluded cautiously that market-based carbon emission abatement scheme is effective to reduce carbon emission and to accomplish regulatory carbon emission abatement goal.

Citation: Dayi He, Xiaoling Chen, Qi Huang. Influences of carbon emission abatement on firms' production policy based on newsboy model. Journal of Industrial and Management Optimization, 2017, 13 (1) : 251-265. doi: 10.3934/jimo.2016015
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L. Barreto and S. Kypreos, Emissions trading and technology deployment in an energy-systems 'bottom up' model with technology learning, European Journal of Operational Research, 158 (2004), 243-261.  doi: 10.1016/S0377-2217(03)00350-3.

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S. Bode, Multi-period emission strading in the electricity sector-winners and losers, Energy Policy, 34 (2006), 680-691. 

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S. Curkovic, Environmentally responsible manufacturing: The development and validation of a measurement model, European Journal of Operational Research, 146 (2003), 130-155. 

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M. KaraS. SyriA. LehtiläS. Heylynen and V. Kekkonen, The impacts of EU CO2 emissions trading on electricity markets and electricity consumers in Finland, Energy Economics, 30 (2008), 193-211. 

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R. D. Klassen and D. C. Whybark, Environmental management in operations, Decision Sciences, 30 (1999), 601-631. 

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H. E. Klingelhöfer, Investments in EOP-technologies and emissions trading-results from a linear programming approach and sensitivity analysis, European Journal of Operational Research, 196 (2009), 370-383.  doi: 10.1016/j.ejor.2008.03.016.

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P. KunschJ. Springael and J. P. Brans, The zero-emission certificates: A novel CO$_2$-pollution reduction instrument applied to the electricity market, European Journal of Operational Research, 153 (2004), 386-399.  doi: 10.1016/S0377-2217(03)00160-7.

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S. LasalóH. IgnacioC. J. Carlos and S. Antonio, CO2 emission trading within the European Union and Annex B countries: The cement industry case, Energy Policy, 34 (2006), 72-87. 

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C. F. LeeS. J. Lin and C. Lewis, Analysis of the impacts of combining carbon taxation and emission trading on different industry sectors, Energy Policy, 36 (2008), 722-729.  doi: 10.1016/j.enpol.2007.10.025.

[10]

P. Letmathe and N. Balakrishnan, Environmental considerations on the optimal product mix, European Journal of Operational Research, 167 (2005), 398-412.  doi: 10.1016/j.ejor.2004.04.025.

[11]

C. LiaoH. Önal and M.-H. Chen, Average shadow price and equilibrium price: A case study of tradable pollution permit markets, European Journal of Operational Research, 196 (2009), 1207-1213.  doi: 10.1016/j.ejor.2008.04.032.

[12]

P. Lund, Impacts of EU carbon emission trade directive on energy-intensive industries indicative micro-economic analyses, Ecological Economics, 63 (2007), 799-806.  doi: 10.1016/j.ecolecon.2007.02.002.

[13]

J.-L. MoL. Zhu and Y. Fan, The impact of the EU ETS on the corporate value of European electricity corporations, Energy, 45 (2012), 3-11.  doi: 10.1016/j.energy.2012.02.037.

[14]

T. PenkuhnT. SpenglerH. Püchert and O. Rentz, Environmental integrated production planning for the ammonia synthesis, European Journal of Operational Research, 97 (1997), 327-336. 

[15]

J. RemmersT. MorgensternG. SchonsH. D. Haasis and O. Rentz, Integration of air pollution control technologies in linear energy-environmental models, European Journal of Operational Research, 47 (1990), 306-316. 

[16]

D. ShaofuD. JunfengL. Liang and Z. Jingjiang, Optimal Production Policy with Emission Permits and Trading, Chinese Journal of Management Science, 17 (2009), 81-86. 

[17]

H. van Asselt and F. Biermann, European emissions trading and the international competitiveness of energy-intensive industries: A legal and political evaluation of possible supporting measures, Energy Policy, 35 (2007), 497-506.  doi: 10.1016/j.enpol.2005.12.013.

[18]

F. Wirl, Evaluation of management strategies under environmental constraints, European Journal of Operational Research, 55 (1991), 191-200. 

[19]

J. Zhang, Emission-dependent Production and Operation Optimization with Emission Permits and Trading, Ph. D thesis, University of Science and Technology of China, 2010.

show all references

References:
[1]

L. Barreto and S. Kypreos, Emissions trading and technology deployment in an energy-systems 'bottom up' model with technology learning, European Journal of Operational Research, 158 (2004), 243-261.  doi: 10.1016/S0377-2217(03)00350-3.

[2]

S. Bode, Multi-period emission strading in the electricity sector-winners and losers, Energy Policy, 34 (2006), 680-691. 

[3]

S. Curkovic, Environmentally responsible manufacturing: The development and validation of a measurement model, European Journal of Operational Research, 146 (2003), 130-155. 

[4]

M. KaraS. SyriA. LehtiläS. Heylynen and V. Kekkonen, The impacts of EU CO2 emissions trading on electricity markets and electricity consumers in Finland, Energy Economics, 30 (2008), 193-211. 

[5]

R. D. Klassen and D. C. Whybark, Environmental management in operations, Decision Sciences, 30 (1999), 601-631. 

[6]

H. E. Klingelhöfer, Investments in EOP-technologies and emissions trading-results from a linear programming approach and sensitivity analysis, European Journal of Operational Research, 196 (2009), 370-383.  doi: 10.1016/j.ejor.2008.03.016.

[7]

P. KunschJ. Springael and J. P. Brans, The zero-emission certificates: A novel CO$_2$-pollution reduction instrument applied to the electricity market, European Journal of Operational Research, 153 (2004), 386-399.  doi: 10.1016/S0377-2217(03)00160-7.

[8]

S. LasalóH. IgnacioC. J. Carlos and S. Antonio, CO2 emission trading within the European Union and Annex B countries: The cement industry case, Energy Policy, 34 (2006), 72-87. 

[9]

C. F. LeeS. J. Lin and C. Lewis, Analysis of the impacts of combining carbon taxation and emission trading on different industry sectors, Energy Policy, 36 (2008), 722-729.  doi: 10.1016/j.enpol.2007.10.025.

[10]

P. Letmathe and N. Balakrishnan, Environmental considerations on the optimal product mix, European Journal of Operational Research, 167 (2005), 398-412.  doi: 10.1016/j.ejor.2004.04.025.

[11]

C. LiaoH. Önal and M.-H. Chen, Average shadow price and equilibrium price: A case study of tradable pollution permit markets, European Journal of Operational Research, 196 (2009), 1207-1213.  doi: 10.1016/j.ejor.2008.04.032.

[12]

P. Lund, Impacts of EU carbon emission trade directive on energy-intensive industries indicative micro-economic analyses, Ecological Economics, 63 (2007), 799-806.  doi: 10.1016/j.ecolecon.2007.02.002.

[13]

J.-L. MoL. Zhu and Y. Fan, The impact of the EU ETS on the corporate value of European electricity corporations, Energy, 45 (2012), 3-11.  doi: 10.1016/j.energy.2012.02.037.

[14]

T. PenkuhnT. SpenglerH. Püchert and O. Rentz, Environmental integrated production planning for the ammonia synthesis, European Journal of Operational Research, 97 (1997), 327-336. 

[15]

J. RemmersT. MorgensternG. SchonsH. D. Haasis and O. Rentz, Integration of air pollution control technologies in linear energy-environmental models, European Journal of Operational Research, 47 (1990), 306-316. 

[16]

D. ShaofuD. JunfengL. Liang and Z. Jingjiang, Optimal Production Policy with Emission Permits and Trading, Chinese Journal of Management Science, 17 (2009), 81-86. 

[17]

H. van Asselt and F. Biermann, European emissions trading and the international competitiveness of energy-intensive industries: A legal and political evaluation of possible supporting measures, Energy Policy, 35 (2007), 497-506.  doi: 10.1016/j.enpol.2005.12.013.

[18]

F. Wirl, Evaluation of management strategies under environmental constraints, European Journal of Operational Research, 55 (1991), 191-200. 

[19]

J. Zhang, Emission-dependent Production and Operation Optimization with Emission Permits and Trading, Ph. D thesis, University of Science and Technology of China, 2010.

Figure 1.  Optimal decision making without CEA trading
Figure 2.  Production decision-making with CEA trading
Figure 3.  Influence of CEA trading on firm's decision on production plan
Figure 4.  Influence of CEA's price when production limited by CEA constraint
Figure 5.  Influence of CEA's price when the firm is not limited by CEA constraint
Figure 6.  Influence of product price when production limited by CEA constraint
Table 1.  Influence of CEA's price when production limited by CEA
PcQ1*E[Π(Q1*)]Limited by CEAQ2*E[Π(Q2*)]Producing
01505999.99Y---
301505999.99Y246.078711.93Y
501505999.99Y227.826961.68Y
701505999.99Y06570N
901505999.99Y06570N
PcQ1*E[Π(Q1*)]Limited by CEAQ2*E[Π(Q2*)]Producing
01505999.99Y---
301505999.99Y246.078711.93Y
501505999.99Y227.826961.68Y
701505999.99Y06570N
901505999.99Y06570N
Table 2.  Influence of CEA's price when the firm is not limited by CEA constraint
PcQ1*E[Π(Q1*)]Limited by CEAQ2*E[Π(Q2*)]Producing
0272.1811961.68N---
30272.1811961.68N246.0713211.93Y
50272.1811961.68N227.8214461.68Y
70272.1811961.68N017250N
90272.1811961.68N023250N
PcQ1*E[Π(Q1*)]Limited by CEAQ2*E[Π(Q2*)]Producing
0272.1811961.68N---
30272.1811961.68N246.0713211.93Y
50272.1811961.68N227.8214461.68Y
70272.1811961.68N017250N
90272.1811961.68N023250N
Table 3.  Influence of product price when production limited by CEA constraint
PmQ1*E[Π(Q1*)]Limited by CEAQ2*E[Π(Q2*)]Producing
351502249.99Y227.292886.92Y
451502249.99Y237.445178.58Y
551502249.99Y243.677525.61Y
651502249.99Y248.169904.55Y
751502249.99Y251.6512304.57Y
PmQ1*E[Π(Q1*)]Limited by CEAQ2*E[Π(Q2*)]Producing
351502249.99Y227.292886.92Y
451502249.99Y237.445178.58Y
551502249.99Y243.677525.61Y
651502249.99Y248.169904.55Y
751502249.99Y251.6512304.57Y
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