Role of risk aversion in operational decisions with remanufacturing under emissions price volatility

Abstract

Previous studies have extensively investigated the optimal operational decisions for firms under emission trading scheme, assuming a constant emissions price. However, the volatility of the emissions price has always been ignored, leaving the resulting operational decisions unclear for risk-averse firms. In this paper, we examine the impacts of risk aversion in the presence of emissions price volatility. Specifically, we investigate a risk-averse firm that strives to reduce associated costs through emissions abatement under emissions price volatility. The firm sells both new and remanufactured products. To illustrate the role of risk aversion, we sequentially examine risk-neutral and risk-averse scenarios using the mean–variance criterion as the risk aversion measurement. Among other results, we demonstrate that the risk-averse firm has incentives not only to remanufacture all used products, but also to increase the remanufactured quantity under certain conditions. Surprisingly, we find that risk aversion may not always hinder investments in emissions reduction. Subsequently, we discuss how risk aversion influences consumers and the environment, using the life cycle analysis-based approach to model environmental impacts. The results indicate that as the degree of risk aversion increases, consumers are worse-off, and there is a constant conflict between economic and environmental objectives. Additionally, it is interesting to find that the emission abatement investment strategy does not necessarily improve environmental benefits.