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Optimal Goods Production Subject to Emissions Trading with Price Floor

Author

Listed:
  • Ryle S. Perera

    (School of Banking and Finance, UNSW Business School, University of New South Wales, Sydney, NSW 2052, Australia)

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.

Suggested Citation

  • Ryle S. Perera, 2024. "Optimal Goods Production Subject to Emissions Trading with Price Floor," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 26(03), pages 1-23, September.
    • Handle: RePEc:wsi:igtrxx:v:26:y:2024:i:03:n:s0219198924500038
    DOI: 10.1142/S0219198924500038
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    More about this item

    Keywords

    Game theory; decision analysis; newsvendor model; stochastic differential game; Stackelberg game;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q59 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Other

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