IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v10y2018i10p3681-d175585.html
   My bibliography  Save this article

Decision and Performance Analysis of a Price-Setting Manufacturer with Options under a Flexible-Cap Emission Trading Scheme (ETS)

Author

Listed:
  • Shuyi Wang

    (College of Management and Economics, Tianjin University, Tianjin 300072, China
    Department of Industrial and Manufacturing Systems Engineering, The University of Hong Kong, Hong Kong, China)

  • Zhenhua Wu

    (College of Management and Economics, Tianjin University, Tianjin 300072, China)

  • Baochen Yang

    (College of Management and Economics, Tianjin University, Tianjin 300072, China)

Abstract

An Emission Trading Scheme (ETS) is widely considered to reduce carbon emissions and achieve sustainability. Unsatisfactory results of European Union Emission trading scheme (EU ETS) make China’s government propose a flexible-cap ETS system to overcome its weakness. This research is the first one introducing the flexible cap to limit the manufacturing carbon footprint. Current research on emission reduction primarily focuses on introducing option contracts to better develop the carbon market, with little consideration of the effectiveness of these contracts on the manufacturer’s optimality facing demand risks. This research fills this research gap by using call option contract to reduce the emission costs for a price-setting manufacturer under the flexible ETS. Newsvendor models are built to investigate the behaviours and performances of manufacturers, with a call option contract when the price-driven demand is uncertain. The joint emission ordering and product pricing problem is solved by three emission ordering policies: the non-option, only option, and mixed emission ordering policy. Analytical and numerical studies have shown that the mixed policy outperforms the others in profitability, and the only option policy provides more flexibility but poor profitability. Furthermore, the mixed ordering policy better protects against price volatility and stringent emission restrictions. Managerial insights help emission-dependent manufacturers to manage their carbon assets for better survival in an increasingly stringent emission market. This paper investigates the effectiveness of the option contract on manufacture optimality in the flexible-cap ETS system, in which the joint emission ordering and production pricing problem under demand uncertainty is solved by the newsvendor model.

Suggested Citation

  • Shuyi Wang & Zhenhua Wu & Baochen Yang, 2018. "Decision and Performance Analysis of a Price-Setting Manufacturer with Options under a Flexible-Cap Emission Trading Scheme (ETS)," Sustainability, MDPI, vol. 10(10), pages 1-22, October.
    • Handle: RePEc:gam:jsusta:v:10:y:2018:i:10:p:3681-:d:175585
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/10/10/3681/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/10/10/3681/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Nicholas C. Petruzzi & Maqbool Dada, 1999. "Pricing and the Newsvendor Problem: A Review with Extensions," Operations Research, INFORMS, vol. 47(2), pages 183-194, April.
    2. Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
    3. Chong Wang & Xu Chen, 2015. "Optimal ordering policy for a price-setting newsvendor with option contracts under demand uncertainty," International Journal of Production Research, Taylor & Francis Journals, vol. 53(20), pages 6279-6293, October.
    4. Zhou, P. & Wang, M., 2016. "Carbon dioxide emissions allocation: A review," Ecological Economics, Elsevier, vol. 125(C), pages 47-59.
    5. Marliese Uhrig-Homburg & Michael Wagner, 2008. "Derivative Instruments in the EU Emissions Trading Scheme — An Early Market Perspective," Energy & Environment, , vol. 19(5), pages 635-655, September.
    6. Cong, Ren & Lo, Alex Y., 2017. "Emission trading and carbon market performance in Shenzhen, China," Applied Energy, Elsevier, vol. 193(C), pages 414-425.
    7. Marc Chesney & Luca Taschini, 2012. "The Endogenous Price Dynamics of Emission Allowances and an Application to CO 2 Option Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(5), pages 447-475, November.
    8. Chevallier, Julien & Le Pen, Yannick & Sévi, Benoît, 2011. "Options introduction and volatility in the EU ETS," Resource and Energy Economics, Elsevier, vol. 33(4), pages 855-880.
    9. Qi, Xiangtong & Bard, Jonathan F. & Yu, Gang, 2004. "Supply chain coordination with demand disruptions," Omega, Elsevier, vol. 32(4), pages 301-312, August.
    10. S. Du & F. Ma & Z. Fu & L. Zhu & J. Zhang, 2015. "Game-theoretic analysis for an emission-dependent supply chain in a ‘cap-and-trade’ system," Annals of Operations Research, Springer, vol. 228(1), pages 135-149, May.
    11. Sabzevar, Nikoo & Enns, S.T. & Bergerson, Joule & Kettunen, Janne, 2017. "Modeling competitive firms' performance under price-sensitive demand and cap-and-trade emissions constraints," International Journal of Production Economics, Elsevier, vol. 184(C), pages 193-209.
    12. Chevallier, Julien & Ielpo, Florian & Mercier, Ludovic, 2009. "Risk aversion and institutional information disclosure on the European carbon market: A case-study of the 2006 compliance event," Energy Policy, Elsevier, vol. 37(1), pages 15-28, January.
    13. repec:dau:papers:123456789/6793 is not listed on IDEAS
    14. Xu, Xiaoping & Zhang, Wei & He, Ping & Xu, Xiaoyan, 2017. "Production and pricing problems in make-to-order supply chain with cap-and-trade regulation," Omega, Elsevier, vol. 66(PB), pages 248-257.
    15. Chong Wang & Xu Chen, 2017. "Option pricing and coordination in the fresh produce supply chain with portfolio contracts," Annals of Operations Research, Springer, vol. 248(1), pages 471-491, January.
    16. Wang, Xihui & Li, Feng & Liang, Liang & Huang, Zhimin & Ashley, Allan, 2015. "Pre-purchasing with option contract and coordination in a relief supply chain," International Journal of Production Economics, Elsevier, vol. 167(C), pages 170-176.
    17. Youhua (Frank) Chen & Saibal Ray & Yuyue Song, 2006. "Optimal pricing and inventory control policy in periodic‐review systems with fixed ordering cost and lost sales," Naval Research Logistics (NRL), John Wiley & Sons, vol. 53(2), pages 117-136, March.
    18. Earl O. Heady & Martin H. Yeh, 1959. "National and Regional Demand Functions for Fertilizer," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 41(2), pages 332-348.
    19. Xu, Xiaoping & He, Ping & Xu, Hao & Zhang, Quanpeng, 2017. "Supply chain coordination with green technology under cap-and-trade regulation," International Journal of Production Economics, Elsevier, vol. 183(PB), pages 433-442.
    20. Burton, Ellison S. & Sanjour, William, 1970. "A simulation approach to air pollution abatement program planning," Socio-Economic Planning Sciences, Elsevier, vol. 4(1), pages 147-159, March.
    21. repec:dau:papers:123456789/4221 is not listed on IDEAS
    22. Vipul Agrawal & Sridhar Seshadri, 2000. "Impact of Uncertainty and Risk Aversion on Price and Order Quantity in the Newsvendor Problem," Manufacturing & Service Operations Management, INFORMS, vol. 2(4), pages 410-423, July.
    23. Wang, Charles X. & Webster, Scott, 2009. "The loss-averse newsvendor problem," Omega, Elsevier, vol. 37(1), pages 93-105, February.
    24. Abad, Prakash, 2014. "Determining optimal price and order size for a price setting newsvendor under cycle service level," International Journal of Production Economics, Elsevier, vol. 158(C), pages 106-113.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ying Gao & Jianteng Xu & Huixin Xu, 2021. "A Flexible Cap-and-Trade Policy and Limited Demand Information Effects on a Sustainable Supply Chain," Sustainability, MDPI, vol. 13(19), pages 1-23, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Chong & Chen, Jing & Chen, Xu, 2017. "Pricing and order decisions with option contracts in the presence of customer returns," International Journal of Production Economics, Elsevier, vol. 193(C), pages 422-436.
    2. Biswas, Indranil & Avittathur, Balram, 2019. "Channel coordination using options contract under simultaneous price and inventory competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 123(C), pages 45-60.
    3. Wang, Chong & Chen, Jing & Chen, Xu, 2019. "The impact of customer returns and bidirectional option contract on refund price and order decisions," European Journal of Operational Research, Elsevier, vol. 274(1), pages 267-279.
    4. Qi Feng & Sirong Luo & J. George Shanthikumar, 2020. "Integrating Dynamic Pricing with Inventory Decisions Under Lost Sales," Management Science, INFORMS, vol. 66(5), pages 2232-2247, May.
    5. Li, Xiang & Qi, Xiangtong & Li, Yongjian, 2021. "On sales effort and pricing decisions under alternative risk criteria," European Journal of Operational Research, Elsevier, vol. 293(2), pages 603-614.
    6. Xu, Song & Fang, Lei, 2020. "Partial credit guarantee and trade credit in an emission-dependent supply chain with capital constraint," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 135(C).
    7. Sina Abbasi & Babek Erdebilli, 2023. "Green Closed-Loop Supply Chain Networks’ Response to Various Carbon Policies during COVID-19," Sustainability, MDPI, vol. 15(4), pages 1-30, February.
    8. Zhitao Xu & Adel Elomri & Shaligram Pokharel & Fatih Mutlu, 2019. "The Design of Green Supply Chains under Carbon Policies: A Literature Review of Quantitative Models," Sustainability, MDPI, vol. 11(11), pages 1-20, May.
    9. Youhua (Frank) Chen & Ye Lu & Minghui Xu, 2012. "Optimal inventory control policy for periodic‐review inventory systems with inventory‐level‐dependent demand," Naval Research Logistics (NRL), John Wiley & Sons, vol. 59(6), pages 430-440, September.
    10. Yugang Yu & Xue Li & Xiaoping Xu, 2022. "Reselling or marketplace mode for an online platform: the choice between cap-and-trade and carbon tax regulation," Annals of Operations Research, Springer, vol. 310(1), pages 293-329, March.
    11. Hu, Benyong & Qu, Jiali & Meng, Chao, 2018. "Supply chain coordination under option contracts with joint pricing under price-dependent demand," International Journal of Production Economics, Elsevier, vol. 205(C), pages 74-86.
    12. Lijo John & Anand Gurumurthy & Arqum Mateen & Gopalakrishnan Narayanamurthy, 2022. "Improving the coordination in the humanitarian supply chain: exploring the role of options contract," Annals of Operations Research, Springer, vol. 319(1), pages 15-40, December.
    13. Mitra, Subrata, 2018. "Newsvendor problem with clearance pricing," European Journal of Operational Research, Elsevier, vol. 268(1), pages 193-202.
    14. Bai, Tian & Wu, Meng & Zhu, Stuart X., 2019. "Pricing and ordering by a loss averse newsvendor with reference dependence," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 131(C), pages 343-365.
    15. Xu, Song & Govindan, Kannan & Wang, Wanru & Yang, Wenting, 2024. "Supply chain management under cap-and-trade regulation: A literature review and research opportunities," International Journal of Production Economics, Elsevier, vol. 271(C).
    16. Kuiti, Mithu Rani & Ghosh, Debabrata & Basu, Preetam & Bisi, Arnab, 2020. "Do cap-and-trade policies drive environmental and social goals in supply chains: Strategic decisions, collaboration, and contract choices," International Journal of Production Economics, Elsevier, vol. 223(C).
    17. Ma, Xueli & Wang, Jian & Bai, Qingguo & Wang, Shuyun, 2020. "Optimization of a three-echelon cold chain considering freshness-keeping efforts under cap-and-trade regulation in Industry 4.0," International Journal of Production Economics, Elsevier, vol. 220(C).
    18. Asian, Sobhan & Wang, Jian & Dickson, Geoff, 2020. "Trade disruptions, behavioral biases, and social influences: Can luxury sporting goods supply chains be immunized?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 143(C).
    19. Wang, Daao & Dimitrov, Stanko & Jian, Lirong, 2020. "Optimal inventory decisions for a risk-averse retailer when offering layaway," European Journal of Operational Research, Elsevier, vol. 284(1), pages 108-120.
    20. Wang, Ruopeng & Wang, Jinting, 2018. "Procurement strategies with quantity-oriented reference point and loss aversion," Omega, Elsevier, vol. 80(C), pages 1-11.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:10:y:2018:i:10:p:3681-:d:175585. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.