Optimal production and carbon emission reduction level under cap-and-trade and low carbon subsidy policies

Abstract

In recent years, massive carbon emissions have caused serious global environmental damage such as a worsening greenhouse effect and thick haze. To curb carbon emissions as well as maintain sustainable economic development, governments promote the development of low carbon economy by issuing multiple policies among which the cap-and-trade policy (CTP) and low carbon subsidy policy (LCSP) are widely adopted. Moreover, manufacturers are increasingly adopting carbon emission reduction technology to produce greener products considering related government policies and rising environmental awareness among consumers. To give policy-making insights to governments as well as production and carbon emission reduction decision-making insights to manufacturers, this paper investigates the impacts of CTP and LCSP on the production and carbon emission reduction level of a manufacturer, and explores which policy is better for society. The results show that the carbon emission reduction level increases as the carbon trading price increases, whereas it is independent of the unit low carbon subsidy. Interestingly, the carbon trading price does not always have a negative effect on the manufacturer's profit, and the cap does not always produce a positive effect on the manufacturer's profit. More importantly, we find that LCSP is more beneficial to society when the environmental damage coefficient is less than a threshold, but otherwise CTP is more beneficial.