Grandfathering or benchmarking: Which is more viable for the manufacturer’s low-carbon activities?

Abstract

Under the emissions trading policy, two typical carbon allowance allocation rules of grandfathering and benchmarking are widely adopted in the present carbon markets. Based on the mathematical modeling method, this paper explores which allocation rule is more viable for manufacturers’ low-carbon activities including abatement investment and remanufacturing activities. Meanwhile, the effects on total profit, total carbon emissions, consumer surplus, and social welfare are discussed through numerical analysis. The results show that benchmarking is more viable for abatement investment activities of manufacturers than grandfathering. Additionally, benchmarking is always more viable for remanufacturing activities of manufacturers only in a situation with a higher consumer low-carbon preference. Otherwise, which allocation rule is more beneficial for remanufacturing activities mainly depends on the abatement cost coefficient. Correspondingly, the higher the consumer low-carbon preference or the lower the abatement cost, the more viable the benchmarking is to achieve each performance target (e.g., total profit, emissions control, consumer surplus, and social welfare). Based on these findings, this paper also recommends managerial insights for manufacturers and policy implications for policy-makers.