Optimal Carbon Abatement Strategy for Manufacturers under Cap-and-Trade

Abstract

Carbon emission abatement is very important for manufacturers regulated by environmental policies. However, choosing an optimal carbon abatement strategy is difficult for many firms. This paper attempts to explore the appropriate carbon abatement strategy for firms that are regulated by cap-and-trade. Specifically, by bringing remanufacturing into consideration, this paper examines a manufacturer that has four alternative carbon abatement strategies: (1) do nothing, (2) invest in carbon abatement, (3) engage in remanufacturing, or (4) become involved in investment and remanufacturing together. The models of these four strategies are first developed in a monopolistic operating environment. The results show that among the four carbon abatement strategies, although the fourth strategy has the highest costs, it generates the largest profits for the manufacturer, passes the greatest benefits along to consumers, and has the best environmental performance. Next, this study is extended to a competitive environment. The results show that the optimal strategy in the monopolistic environment no longer maximizes profits, and decision guidance is offered for the manufacturer operating under such an environment.