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Joint Control of Emissions Permit Trading and Production Involving Fixed and Variable Transaction Costs

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  • Quan Yuan
  • Youhua (Frank) Chen
  • Jian Yang
  • Yun Zhou

Abstract

The use of permit markets to mitigate harmful emissions is on the rise. When participating in such a market, an emitting firm needs to acquire from it permits that cover emissions resulting from production. Thus, it has to simultaneously cope with fluctuating permit prices and random demand, and also juggle between the activities of permit trading and permit‐consuming production. We shed light on this complex dynamic control problem, while confronting difficulties brought on by fixed as well as variable transaction costs associated with permit trading. We exploit K‐convexity variants that are suitable for two‐dimensional control, and achieve the partial characterization of optimal control policies. When the selling of permits is prohibited, we prescribe an (s, S)‐type permit purchasing policy. For the more general case involving two‐way trading, we find it optimal to carry out trading in a three‐interval fashion. Heuristics, including one based on the uncoupling of trading and production activities, are introduced. Their effectiveness has been illustrated in computational studies.

Suggested Citation

  • Quan Yuan & Youhua (Frank) Chen & Jian Yang & Yun Zhou, 2018. "Joint Control of Emissions Permit Trading and Production Involving Fixed and Variable Transaction Costs," Production and Operations Management, Production and Operations Management Society, vol. 27(8), pages 1420-1454, August.
    • Handle: RePEc:bla:popmgt:v:27:y:2018:i:8:p:1420-1454
    DOI: 10.1111/poms.12875
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    Cited by:

    1. Yunke Mai & Bin Hu, 2023. "Optimizing Free-to-Play Multiplayer Games with Premium Subscription," Management Science, INFORMS, vol. 69(6), pages 3437-3456, June.
    2. Yang, Guangyong & Ji, Guojun & Tan, Kim Hua, 2020. "Impact of regulatory intervention and consumer environmental concern on product introduction," International Journal of Production Economics, Elsevier, vol. 230(C).
    3. Xiting Gong & Youhua (Frank) Chen & Quan Yuan, 2022. "Coordinating Inventory and Pricing Decisions Under Total Minimum Commitment Contracts," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 511-528, February.
    4. Greys Sošić, 2023. "Stable Linking of the Emission Permit Markets," Sustainability, MDPI, vol. 15(6), pages 1-27, March.
    5. Xiaoshuai Fan & Kanglin Chen & Ying-Ju Chen, 2023. "Is Price Commitment a Better Solution to Control Carbon Emissions and Promote Technology Investment?," Management Science, INFORMS, vol. 69(1), pages 325-341, January.
    6. Wei, Yigang & Liang, Xin & Xu, Liang & Kou, Gang & Chevallier, Julien, 2023. "Trading, storage, or penalty? Uncovering firms' decision-making behavior in the Shanghai emissions trading scheme: Insights from agent-based modeling," Energy Economics, Elsevier, vol. 117(C).
    7. Wang, Xinyu & Sethi, Suresh P. & Chang, Shuhua, 2022. "Pollution abatement using cap-and-trade in a dynamic supply chain and its coordination," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 158(C).
    8. Jónas Oddur Jónasson & Kamalini Ramdas & Alp Sungu, 2022. "Social impact operations at the global base of the pyramid," Production and Operations Management, Production and Operations Management Society, vol. 31(12), pages 4364-4378, December.
    9. Hyunwoo Park & Christian C. Blanco & Elliot Bendoly, 2022. "Vessel sharing and its impact on maritime operations and carbon emissions," Production and Operations Management, Production and Operations Management Society, vol. 31(7), pages 2925-2942, July.
    10. Yuan, Quan & Hua, Zhongsheng & Shen, Bin, 2021. "An automated system of emissions permit trading for transportation firms," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 152(C).

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