Impact of a reactive capacity production on the firm’s operational management under carbon cap and trade system

Abstract

In recent years, there has been an increase consensus that the firms’ social responsibility plays an essential role for the success of the firms. To address the need to be socially and environmentally responsible, this paper considers a firm, which makes a production decision under the carbon emission cap and trade system. The objective of this study is to examine the impact of the firm’s flexible operational strategy, called a reactive capacity production strategy, on the firm’s managerial efficiency under the carbon cap and trade system. The reactive capacity production strategy has been widely used for agile response on the market. The study shows that the firm with reactive capacity production strategy under the carbon cap and trade market may choose the first production quantity less than the firm without reactive capacity and provide more profit than the firm without reactive capacity. Also, the study analytically provides the optimal solution for the expected amount of carbon emission traded on the carbon trading market and the expected total amount of carbon emission by the firm with reactive capacity under the carbon cap and trade market.