Emission allowance allocation mechanism design: a low-carbon operations perspective

S.I.: RealCaseOR
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Abstract

Governments around the world are seeking an effective mechanism to cope with air pollution and climate change. The allocation of emission allowances, which is a key mechanism in the cap-and-trade system, is an important and intricate puzzle faced by environmental agencies. In this paper, we build a Stackelberg model to explore the emission allowance allocation mechanism design from an operations perspective. We demonstrate the feasibility and effectiveness of a linear emission allowance allocation mechanism. The results show that the emission allowance allocated by the government should always be insufficient to satisfy the ex-post emission demand at the industry level, even with low-carbon investment. To analyze the impacts on firms’ decision-makings, we explore a scenario in which two firms in the same industry sell a homogenous product to the market. The optimal low-carbon investment and production decisions are significantly affected by these market and carbon-related factors. Numerical examples are presented to further demonstrate the results that our paper has derived and investigate the optimal operational decisions of the two firms. Several meaningful management insights on allocation mechanism design and low-carbon operations of firms are obtained.

Keywords

Carbon emission Cap-and-trade Emission allowance allocation Low-carbon operations 

Notes

Acknowledgements

We are grateful for the editor’s and anonymous reviewers’ constructive comments and suggestions which have greatly improved the quality of this paper. We also thank Dr. Li Wang for her valuable suggestions on model analysis and acknowledge the USTC Modern Logistics Research Centre for its data-driven practical platform. This research was supported by the National Natural Science Foundation of China (Grant Nos. 71571171, 71631006, 71471168), the Foundation for International Cooperation and Exchange of the National Natural Science Foundation of China (No. 71520107002), the Youth Innovation Promotion Association, CAS (Grant No. 2015364) and the Fundamental Research Funds for the Central Universities (Grant No. WK2040160028).

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.School of ManagementUniversity of Science and Technology of ChinaHefeiPeople’s Republic of China

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