Low-Carbon Strategies for Competing Firms Under Cap-and-Trade Regulation With Consumer Preference

Abstract

This paper develops price and low-carbon competition models between one socially responsible manufacturer (RM) and one ordinary manufacturer (OM). We investigate how manufacturers’ low-carbon behaviors are affected by factors such as consumers’ low-carbon preference, the cap-and-trade regulation and competing environment. Our results show that without the cap-and-trade regulation and consumers’ low-carbon preference, both RM and OM produce ordinary product. By contrast, with the cap-and-trade regulation, even if consumers do not have low-carbon preference, both RM and OM will reduce carbon emissions if they have the capability. Without the cap-and-trade regulation, as expected, we find that a manufacturer’s price and emission reduction rate are always strategic complements. With the cap-and-trade regulation, however, a manufacturer’s price and emission reduction rate may be strategic substitutes when the carbon market price is high. Furthermore, we demonstrate that, with the cap-and-trade regulation, unlike OM, RM may not be able to benefit always from a high carbon quota issued by the government. Specifically, when OM’s emission reduction cost is low, a high carbon quota could hurt RM’s bottom line. In addition, we show that, even though it is always beneficial for OM to acquire the low-carbon technology, the benefit of doing so diminishes as the competition intensifies, the government carbon quota decreases, or the carbon market price increases.