Effect of risk-aversion on the operational decision under carbon cap and trade

Abstract

In this study, we provide an operational decision model for the firm under the uncertain demand and the carbon cap and trade regulation. For this derivation, a newsvendor model is used in which the decision maker is assumed to be risk-averse so that the utility function for the objective function is concave. Under this situation, we derive an optimal operational decision and its implication. Then, first, we show that there exists an optimal solution and provides an optimality condition. Then, we compare the optimal solution for the risk-aversion with the one for the risk-neutral case so that we show that, as more risk averse the decision maker under the carbon cap and trade regulation is, the less the optimal solution becomes. Also, we provide various comparative static analysis results for the risk aversion under the carbon cap and trade regulation: first, as the salvage price increases, the optimal solution increases. Second, as the unit cost and carbon emission per unit production increase, the optimal solution decreases. Third, as the carbon emission cap increases, the optimal solution increases. However, the effect of unit selling price on the optimal solution does not have monotonic property in general but the risk-neutral case shows the monotonic effect.