Optimal Technology Investment under Emission Trading Policy

Abstract

Low-carbon economy is gaining growing attention nowadays as global warming intensifies. As a market-based policy, emission trading policy is widely considered an effective means to achieve the doublewin of economic development and environmental protection. Under such circumstances, carbon trading markets are developing rapidly in many countries and regions, demanding more attention to compliance strategy issues for emission-intensive companies. In this study, we build a dynamic programming model in search of the optimal emission trading and technology investment decisions for a make-to-order company faced with a stochastic demand under emission trading policy. After a comprehensive analysis of the proposed model, we find that an optimal emission permit level, which increases in carbon penalty and decreases in carbon price, exists in each period. As for the abatement technology investment decision, the firm should invest only if the investment cost per unit of abatement effort is less than a certain threshold, which increases in carbon penalty and carbon price. On the basis of a two-period dynamic programming model, we further explore the problem of investment timing. Results show how optimal investment decisions are influenced by the speed of technology progress under different parameters. These findings are important for firms to choose the time of investment depending on specific situations.