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


  • Ping He

    () (South China University of Technology)

  • Guowei Dou

    () (Shenzhen University)

  • Wei Zhang

    () (Zhejiang University)


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.

Suggested Citation

  • Ping He & Guowei Dou & Wei Zhang, 2017. "Optimal production planning and cap setting under cap-and-trade regulation," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 68(9), pages 1094-1105, September.
  • Handle: RePEc:pal:jorsoc:v:68:y:2017:i:9:d:10.1057_s41274-016-0123-1
    DOI: 10.1057/s41274-016-0123-1

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