Green capacity and technology choice strategies with emission constraint setting

Abstract

Under dual pressures of stringent environmental policies and upbeat green demand, manufacturers which used to apply traditional manufacturing technology are motivated to construct green capacity and revamp their production strategies. In this paper, we establish a Stackleberg game between a welfare-maximizing regulator who sets an emission cap and a profit-seeking manufacturer who makes technology choice consisting of green capacity construction and production strategies. The firm builds green capacity under uncertain green demand, but prices and produces until the demand is fully observable. Equilibrium emission cap for the regulator and the response of the firm are derived. We discover that equilibrium strategies adjustment is highly affected by two key correlations between two products: comparative emission performance and product substitutability. Specifically, if comparative emission performance of green production is greater (less) than product substitutability, the equilibrium green capacity decreases (increases) with the environmental damage degree, and the equilibrium emission cap tightens (levels down) with the investment cost of green capacity. Interestingly, as green manufacturing generates more unit emission, the equilibrium emission cap first increases, then declines and finally flattens. In response, the firm adopts the single-green technology firstly, after which it turns to a mixed production mode and eventually operates merely conventional production.