Keywords: optimal production, emission permits, emission trading, production policies, emission-dependent production, stochastic demand, cap and trade, emission quotas, government quotas, emission savings, tradeoffs, production scale, expected profits, profit maximisation, single-time purification, multi-time purification, society, systems science, assessment methods, social systems
Optimal emission-dependent production policy with stochastic demand
The paper addresses the issue of manufacturer's optimal production policy under stochastic demand in an emission 'cap and trade' system, in which emission permit becomes another essential factor for production. Three typical sources of emission permits are considered, including emission quota allocated by the government, permits purchased via emission trading, and emission savings via purification. The emission-dependent manufacturer will balance a tradeoff to enable effective production and to determine an appropriate production scale to maximise expected profit. With these considerations in mind, two different cases of single- and multi-time purification are investigated respectively, and the optimal emission-dependent production models are proposed. Moreover, the existence and uniqueness of the optimal policy are guaranteed, and several valuable managerial insights are further concluded.