Optimal Production Planning with Emissions Trading


Speaker


Abstract

Emissions trading is a market-based mechanism to curb emissions. To study its impact on production planning as production is often a major source of emissions, we develop a dynamic production system in which a manufacturer produces a single product to satisfy random customer demand. Each unit produced would generate emissions and so consume a certain number of emission allowances. The manufacturer can use a green or a regular technology or both to produce, of which the green technology is more costly but yields fewer emissions. In each period, the quantity that the manufacturer can produce depends on the technology selection and the available emission allowances. The manufacturer can also buy or sell the allowances in an outside market. We first derive several important structural properties and then based upon them, characterize the optimal emissions trading and production policies that minimize the manufacturer's expected total discounted cost. In particular, the optimal emissions trading policy is a target interval policy with two thresholds that decrease with the starting inventory level. The optimal production policy is established by first identifying scenarios where the manufacturer should adopt one or both technologies and then showing the optimality of base-stock type of production policies. We find that the optimal base-stock level is a constant when the manufacturer trades the allowance or uses both technologies while it is a function depending on the system states when the firm does not trade the allowance and adopts just one technology.
 
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Dr. Y. Yu
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