Carbon emissions abatement: Emissions trading vs consumer awareness

Abstract

This paper studies firms' carbon emissions abatement and pricing strategies in a competitive market when facing the pressure from both emissions trading price and consumer carbon awareness. We develop a duopoly game and investigate how problem parameters affect the equilibrium outcome. We find that carbon price and consumer awareness level have an additive effect on a firm's emissions abatement effort. However, these two factors have different implications for the firms' prices and profits. In particular, the firms' prices first decrease and then increase with consumer awareness level, while the firms' profits first decrease and then increase with carbon price when there is a moderate emissions cap. From both the consumers' and the firms' standpoints, an appropriate emissions abatement strategy for the central planner is to first push up the carbon price and then promote consumer carbon awareness. Such a strategy provides incentives for firms to invest in carbon abatement activities, without causing drastic changes to product prices and firm profits. Finally, we generalize the base model to consider more than two firms. It has been found that raising carbon price may be a better policy choice than promoting consumer awareness for the central planner who aims at reducing carbon emissions in various industries with different competition levels.