Abstract
Motivated by a unique legislative practice targeted at increasing new energy vehicles consumption with carbon regulation in China, we study how the program works and how the manufacturer responds. Different from former cash subsidies provided for the buyers, this program intends to stimulate the consumption of green vehicles on the manufacturer side. In this paper, a product differential model on traditional gasoline vehicles (GVs) and new energy vehicles (EVs) is analyzed within a cap and trade regulation system with carbon quota solely provided for EVs. We first examine the effectiveness of carbon regulation program under the case when the manufacturer focuses on primary consumer segment, and the optimal pricing and production strategies are derived. Then, we investigate the firm’s strategic decision of whether or not to enter the replacement market with limited total carbon emission. We have the following main findings. (1) Results show that with the increase in carbon quota for EVs, both the market share of EVs and the manufacturer’s profit increase. However, the change of total consumer surplus is not certain; (2) In this new cap and trade system, with a larger market coverage, the development of a trade old-for-new market brings a greater firm profit which is not affected by the total emission cap. We also find that consumers’ green preference is positive on increasing the demand of EVs, while it is uncertain on the firm’s profit; (3) Importantly, we find that when the carbon quota of new energy vehicles is below a threshold, as the carbon price increases, the demand for GVs increases while the demand for EVs decreases. Therefore, in the formulation of the carbon allowance carbon policy, the impact of carbon price should be fully considered.
Published Version
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