Models for Production Operations and Emissions Permits Purchasing Decisions in the Presence of Emissions Trading Market

Following the lead of the European Union (EU), Japan, and several other regions, the Chinese government has set a timetable for emissions trading schemes within China, including the establishment of a nationwide trading platform by 2015. Six regions, including Guangdong Province, have already been preparing for the launch of regional trading markets. From 2013 onwards, the EU will require all CO2 emitters in certain sectors (power plants, smelter, glass, and so on) to balance all of their emissions from the market, wherein the EU sets an overall aggregate quantity, and all emitters procure from the open market for their emissions.Unlike a commodity input that must be available before production starts, the carbon permits that a firm spends in a year requires balancing only by the end of the year. Thus, the firm has the flexibility as to when and how much to buy from the market over time. This feature brings new research opportunities, as well as challenges. Although some industry experts have already observed that many companies in Europe have incorporated carbon trading into their daily production decisions, few academic publications respond to such a development. Indeed, a great deal of attention has been devoted to emissions reduction issues. However, the research into production operations and emissions permit trading decisions is also a noteworthy subject.Two issues were attempted to be addressed: First, how should the firm coordinate its production and permit purchasing decisions in each period? Second, will a non-coordinated (or decentralized) decision-making procedure incur a substantial cost increase compared with a coordinated decision-making procedure? The first question calls for a general model setting and rigorous analysis, whereas the second aims to draw managerial insights. The full coordination of production operations and permit purchasing decisions requires the integration of operations and treasury management. However, this integration is difficult to achieve in practice. Should the efficiency loss be small, the firm would then keep the two functions working in a relatively separate manner. The preliminary study has obtained promising findings under the electricity generation context, which confirms the conjecture to a certain extent.The two abovementioned research issues for perishable (such as electricity) and nonperishable products will be separately addressed. In addition, the risk issues will also be considered with respect to uncertain carbon costs in the late phase of the present study.