Emission permit banking, pollution abatement and production–inventory control of the firm

In this paper, we present a dynamic model modified with emission permit banking and pollution abatement, and investigate the effect of emission permit banking and pollution abatement on the production–inventory strategy of the firm. After introducing emission permit banking and pollution abatement, the cost function consists of the inventory holding and production costs, the cost of investment in abatement capital goods and the emission procurement/selling cost. Furthermore, the inventory holding costs are linear, production costs are non-decreasing and convex functions of the production level, and the costs of investment in abatement capital goods are increasing and convex functions of the investment level. We compare the optimal production–inventory strategy before emission permit banking and pollution abatement and thereafter. The mathematical investigation is based on the Arrow–Karlin model.

[1]  V. Smith,et al.  Some Welfare Effects of Emission Allowance Trading in a Twice-Regulated Industry , 1993 .

[2]  Gilbert E. Metcalf,et al.  Energy tax credits and residential conservation investment: Evidence from panel data , 1995 .

[3]  Wallace E. Oates,et al.  The Net Benefits of Incentive-Based Regulation: A Case Study of Environmental Standard Setting , 1989 .

[4]  A. Xepapadeas.  Environmental Policy and Firm Behavior: Abatement Investment and Location Decisions Under Uncertainty and Irreversibility , 1999 .

[5]  J. Dales,et al.  Pollution, Property and Prices , 1969 .

[6]  Olivier Herbelot.  Option valuation of flexible investments : the case of environmental investments in the electric power industry , 1992 .

[7]  Bin Zhang,et al.  Multi-item production planning with carbon cap and trade mechanism , 2013 .

[8]  Stuart Mestelman,et al.  Emissions Trading with Shares and Coupons when Control over Discharges Is Uncertain , 1997 .

[9]  Imre Dobos,et al.  The effects of emission trading on production and inventories in the Arrow–Karlin model , 2005 .

[10]  M. Cropper,et al.  Environmental Economics: A Survey , 1992 .

[11]  Nils-Henrik M. von der Fehr,et al.  Prices vs. Quantities: The Irrelevance of Irreversibility , 1999 .

[12]  A. Ramudhin,et al.  Design of sustainable supply chains under the emission trading scheme , 2012 .

[13]  A. Denny Ellerman,et al.  The Temporal Efficiency of So2 Emissions Trading , 2002 .

[14]  Charles B. Moss,et al.  Technology Adoption Decisions under Irreversibility and Uncertainty: An Ex Ante Appproach , 1995 .

[15]  J. Montero,et al.  Market Power in a Storable-Good Market: Theory and Applications to Carbon and Sulfur Trading , 2005 .

[16]  Imre Dobos,et al.  Tradable permits and production-inventory strategies of the firm , 2007 .

[17]  Gilbert E. Metcalf,et al.  Energy conservation investment: Do consumers discount the future correctly? , 1993 .

[18]  Moheb A. Ghali.  Production-planning horizon, production smoothing, and convexity of the cost functions , 2003 .

[19]  Mengdi Gu,et al.  The effect of emission permit trading with banking on firm's production–inventory strategies , 2012 .

[20]  A. Malik,et al.  ENFORCEMENT COSTS and THE CHOICE OF POLICY INSTRUMENTS FOR CONTROLLING POLLUTION , 1992 .

[21]  Jerry A. Hausman,et al.  Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables , 1979 .

[22]  J. Montero,et al.  A Note on Market Power in an Emission Permits Market with Banking , 2005 .

[23]  M. Khanna,et al.  Investment in site-specific crop management under uncertainty: implications for nitrogen pollution control and environmental policy , 2000 .

[24]  R. Godby.  Market Power and Emissions Trading: Theory and Laboratory Results , 2000 .

[25]  Chulho Jung,et al.  Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives , 1996 .

[26]  Janet M. Carey,et al.  A Model of Investment Under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water , 2002 .

[27]  P. Diederen,et al.  Returns on Investments in Energy-saving Technologies Under Energy Price Uncertainty in Dutch Greenhouse Horticulture , 2003 .

[28]  An entry and exit model on the energy-saving investment strategy with real options , 2010 .

[29]  W. Montgomery,et al.  Markets in Licenses and Efficient Pollution Control Programs" Journal of Economic Theory , 1972 .

[30]  Mark B. Cronshaw,et al.  Pollution Permit Markets with Intertemporal Trading and Asymmetric Information , 2001 .

[31]  C. Kling,et al.  An Emission Saved Is an Emission Earned: An Empirical Study of Emission Banking for Light-Duty Vehicle Manufacturers , 1993, Controlling Automobile Air Pollution.

[32]  Tyrone T. Lin,et al.  Applying real options in investment decisions relating to environmental pollution , 2007 .

[33]  H. Elder,et al.  Exclusionary manipulation of markets for pollution rights , 1989 .

[34]  Tyrone T. Lin,et al.  Application of the modified Tobin’s q to an uncertain energy-saving project with the real options concept , 2011 .

[35]  Robert Wilson,et al.  Option value of emission allowances , 1993 .

[36]  T. Considine,et al.  The Environment as a Factor of Production , 2004 .

[37]  G. Metcalf,et al.  Investment Under Alternative Return Assumptions: Comparing Random Walks and Mean Reversion , 1995 .

[38]  J. Rubin.  A model of intertemporal emission trading, banking, and borrowing , 1996 .

[39]  Gilbert E. Metcalf,et al.  Measuring the Energy Savings from Home Improvement Investments: Evidence from Monthly Billing Data , 1997, Review of Economics and Statistics.

[40]  Scott Milliman,et al.  Firm incentives to promote technological change in pollution control: Reply , 1992 .

[41]  J. Montero,et al.  On Pollution Permit Banking and Market Power , 2006 .

[42]  Margaret C. Insley.  On the Option to Invest in Pollution Control Under a Regime of Tradable Emissions Allowances , 2003 .

[43]  Dafna M. Disegni Eshel.  Optimal Allocation of Tradable Pollution Rights and Market Structures , 2005 .

[44]  V. Smith,et al.  Research in Experimental Economics , 1979 .

[45]  R. Hahn.  Market Power and Transferable Property Rights , 1984 .

[46]  R. Sparks,et al.  The experience curve, option value, and the energy paradox , 2009 .

[47]  Knut Sydsæter,et al.  Optimal control theory with economic applications , 1987 .

[48]  Jonathan Rubin,et al.  Bankable Permits for the Control of Environmental Pollution , 1997 .

[49]  A. Jaffe,et al.  The energy paradox and the diffusion of conservation technology , 1994 .

[50]  Richard F. Hartl,et al.  On the optimality of cyclical employment policies: A Numerical Investigation , 1986 .