Implement green improvement or buy emission permit? A cost-benefit analysis under Cap-and-Trade environment

Abstract

To reduce carbon emission more efficiently and effectively, Cap-and-Trade (C&T) and some compulsory environmental regulations are gradually implemented around the world, which brings huge challenges to generating companies. How to balance between production quantity, green improvement and carbon trade under C&T condition becomes an important decision for generating companies. A non-linear programming model considering uncertain demands is proposed in this paper to implement a cost-benefit analysis for the generating companies. Our research results show that with the increase of carbon price, the optimal production quantity and the actual carbon emission drop down. The optimal investment of green improvement is an increasing function of carbon price. However, the emission quota has only impact on the transaction quantity of emission permit in the carbon market. It has nothing to do with the optimal production quantity and investment of green improvement.