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Optimal Policy for Remanufacturing Firms with Carbon Options under Service Requirements

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Abstract

This paper studies the procurement management of carbon financial instruments and the production decisions for an emission-dependent remanufacturing firm under service requirements. In the presence of demand uncertainty, carbon emission options are introduced to hedge risks for the firm who purchases carbon financial instruments under a cap-flexible emission trading scheme (ETS) and then conducts remanufacturing. We develop three optimization models to determine the optimal remanufacturing quantity (procurement quantity of carbon financial instruments) maximizing the firm’s expected profit under three contracts: a pure wholesale price contract, a pure carbon option contract, and a portfolio contract. Through analyses and comparisons of optimal solutions, we demonstrate the values of introducing carbon options and committing to service levels for the firm. Compared with the other two pure contracts, the portfolio contract makes the firm better off. However, high service requirements may lead to a profit loss to the firm. We generalize to the cases when the yield rate is dependent on the quality of used products, when the yield is stochastic, and when carbon price performs volatility. Discussion of these extensions illuminates how the variability of used product quality, yield rate and carbon price influences the firm’s performances.

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Acknowledgments

We thank the editor and two anonymous referees for their constructive comments and many valuable suggestions that have significantly improved the quality of this paper. This work has been supported by the National Natural Science Foundation of China (NSFC), under Grant Nos. 71971058, 71571042, and 71971210.

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Authors and Affiliations

  1. School of Economics and Management, Southeast University, Nanjing, 211189, China

    Junfei Ding, Weida Chen & Shuaishuai Fu

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  1. Junfei Ding
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  2. Weida Chen
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  3. Shuaishuai Fu
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Correspondence to Weida Chen.

Additional information

Junfei Ding is a PhD candidate in the School of Economics and Management at Southeast University, China. He received his BS and MS degree from Henan University of Science and Technology and China University of Mining and Technology in 2016 and 2019, respectively. His research interests include sustainable operations management and supply chain management.

Weida Chen is a full professor in the School of Economics and Management at Southeast University, China. He received his PhD degree in management science and engineering from Southeast University in 2002. His research interests include low-carbon operations management and remanufacturing operations management.

Shuaishuai Fu is a PhD candidate in the School of Economics and Management at Southeast University, China. He received his BS and MS degree from Henan Agricultural University and Beijing Wuzi University in 2016 and 2019, respectively. His research interests include logistics and supply chain management.

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Ding, J., Chen, W. & Fu, S. Optimal Policy for Remanufacturing Firms with Carbon Options under Service Requirements. J. Syst. Sci. Syst. Eng. 31, 34–63 (2022). https://doi.org/10.1007/s11518-021-5512-6

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