Research on Production Strategy with Carbon Emissions

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1 Send Orders of Reprints at The Open Mechanical Engineering Journal, 2013, 7, Research on Production Strategy with Carbon Eissions Honglei Tang,1,2 and Guofang Song 3 Open Access 1 School of Manageent, Shanghai University, Shanghai , P.R. China 2 Huzhou Teachers College, Huzhou , P.R. China 3 Guofang Song, School of Manageent, Shanghai University, Shanghai , P.R. China Abstract: This paper ainly studied the influence on the carbon eission perits and trading on the production strategy for anufacturing enterprises. The enterprises ight obtain carbon eission perits in three different ways, i.e. governent quota, arket trading and purification treatent. The enterprises ust ake a tradeoff between the. The characteristic of purifying cost was analyzed. Then, an optial production odel with carbon eission perits and trading was established. Finally, a typical nuerical experient was eployed to show the influence of the paraeters on optial production decisions. Keywords: Carbon eissions perits and trading, carbon eission reduction, production strategy. 1. INTRODUCTION With the developent of huan society and econoical iproveent, harful eissions increased accordingly, hence it increased environental disasters. The ost typical exaple of this is, carbon dioxide eissions have been proven to be one of the ain culprit of global waring in recent years. Coe into effect in 2005 set by the Kyoto Protocol International Convention for the control and the trading arket eans to effectively achieve eissions reduction effects of eissions echaniss : 1) International Eission Trade (IET) allows Annex I countries (ainly developed) transfer between parts of their allowed eissions 2) Joint Ipleentation echanis (JI) allows Annex I countries fro its investent projects in other industrialized countries have obtained carbon eissions credit, actual result corresponds to transfers between industrialized countries with equal aounts of eission reduction units 3) clean developent echanis (CDM), allows Annex I national of investors fro its in developing countries ipleentation of, and conducive to developing countries sustainable developent of eissions project in the gets by nuclear card of eissions volue (CERs), is allows Annex I in the of national funded support no eissions obligations of national by industrial technology, and activities, reduced greenhouse gas of eissions volue and arrived top annex I national of eissions index. In this way, eissions quotas as factors of production, eissionsdependent enterprises under quota self-specification, exceeding required with eission rights trading arket to other enterprises or green purchase additional eissions rights, otherwise, it will be subject to legal sanctions by production or purification process of enterprises Address correspondence to this author at the School of Manageent, Shanghai University, Shanghai , P.R. China Huzhou Teachers College, Huzhou , P.R. China Tel: Fax: E-ail: hlttj@126.co technological innovation and access to eission-savings you can use trading platfor in the arket to obtain additional revenue. Currently, eission trading related research is ainly focused on the acro level, such as bilateral trading rules between econoies of the eissions how to start the gae in the established rules for the econoies and the econoic effect of eissions trading and eission reduction policy on different countries and industries. In view of the electric power industry, Monica and Francesco studied on the prevailing European eissions trading echanis, carbon eissions trading price for electricity arket pricing strategy, and copares the arket power (Market Power) environent and copetitive environent (Perfect Copetition) under the influence of difference [1]. Kara et al. have taken Finland as an exaple, discussed the European eissions trading to power arket and power users influence [2]. Tsikalakis and Hat ziargyriou coparatively analyzed the carbon eissions trading was peritted or not under the environental benefits of distributed generation [3]. Daien and Philippe in iron and steel industry as an exaple to discuss the European eissions trading schee for production of the industry and the incoe effect [4]. Other scholars, such as Craton and Kerr, Knut, Streiikiene and Roos also have analyzed the influence of eissions trading for different industries and countries fro different point of view [5, 6]. Until now, there has been little docuentation fro a icroscopic perspective to study the eission rights trading. Eissions and becoe an asset when factors of production, several aspects of enterprise production will be significantly affected in particular, fro the icro level is necessary to discuss this issue. Sundarakani et al. have used Lagrangian and Eulerian traffic analysis ethod to establish supply chain carbon eission easureent odel for supply chain design, provided the basis for low carbon [7]. Bode has studied the assignent proble to European power industry as the X / Bentha Open

2 10 The Open Mechanical Engineering Journal, 2013, Volue 7 Tang and Song research background, fro the ulti cycle, eission perits and trading of eission rights [8]. Benjaafar studied the carbon eissions factors in siple supply chain syste, respectively, established a strict eission quota odel, carbon tax odel, cap and trade odel and carbon offset odel for supply chain [9]. Piecyk and Mckinnon have divided the influence factors of carbon eissions for transport of goods by road into structural, erchantability, operation, functionality, external sexual, relationship of products, and established the road transport odel of carbon eissions in 2020 fro the pessiistic and optiistic Outlook [10]. Above all, this article as an exaple of a single anufacturing enterprise, analysis on a given eission liits and allowed eissions free trading optial decision of production probles. 2. BASIC ASSUMPTIONS AND PARAMETERS Governent quotas, arket trading and purification of three sources of eissions, as well as single-cycle production, eissions scenarios, cobined with the reality, we ake the following assuptions: (1) Carbon eissions can be freely traded and that a range of carbon eission rights arket supply (2) If industry is a high-eissions industries with onopolistic or oligopolistic nature, such as energy, electric power, cheical industry, product arket price is deterined by production. Assuing the price yield of linear functions (3) Assue that businesses need to produce out of the production technology, also need to be put into use two types of factors of production, one is the production of high carbon eleents The other one is the production of low carbon eleent, and these two factors of production nuber of input variable, and with incoplete alternative. The production function can be deterined by the kebudaogelasi function of the enterprise (4) In deterining under the production technical level, finished product depending on the aount of raw aterials used by the carbon eissions of certain (5) Carbon eissions using CCS technology processing or purification technology, and carbon eissions savings, and its treatent costs with carbon eissions increase while accelerating, this is consistent with reality. The sybols of the ain paraeters involved in this article is suarized below: q : Producers to be the finished product the total aount of production, decision variables and q = f (, x 2 )= Ax 1 x 2, A represents enterprise production technology, A>0, x 2 epresent eleents of production of high carbon and low carbon nuber of factors of production inputs, and > 0, x 2 > 0, respectively for the two categories of factors of production input on product factors. E(q): Actual eissions fro production, is the yield function of q. Without loss of generality, this article according to the different production factors deterine different eission factors, E(q) = eq = e 1 + e 2 x 2 : Carbon eissions quotas fro the Governent c : Carbon eissions trading arket unit of carbon eissions trading : Carbon eissions obtained through arket transactions, > 0 is buy < 0 is sell. p(q) : Finished product arket prices, deterined by the output. Think about p(q) = K q C: Cost of production, deterined by two factors of production: C = q = c 1 + c 2 x 2 : Purification levels of carbon eissions, 0 1 c: Unit purification cost under the purification level, Continuous and differential and c( 0)= 0, c(1) =+, c> 0, c> 0 : the quantity of treated carbon eissions, decision variables, 0 E( q) : the credit of access to the net carbon eissionsreduction by purification, =. 3. MATHEMATICAL MODEL This article is intended to discuss carbon eissions quotas on production and trading copany of production optiization proble, it needs to consider the costs associated with carbon eissions carbon eissions quotas-- purchase cost and processing costs, purchasing costs of the two production factors in the production process, while other costs can be ignored, this does not affect the analysis results. The production enterprise s net profit is: = qp(q) C(q) c c (1) Earlier assuptions, anufacturer of carbon eissions coe fro three ain sources: Governent quota, adopted by carbon eission savings of and carbon eission credits arket to purchase soe eventually will not exceed the total carbon eissions-carbon eissions, is E( q) + + (2) Enterprise is rational, and carbon eissions through arket transactions, the single phase case, once carbon eissions surpluses, enterprises will also be put on the arket for sale. So the above inequality is converted to: E(q) = + + (3) According to equation (3): = E( q) = E( q) (4) Equation (4) into equation (1): = qp(q) C(q) c [E(q) ] c = qp(q) C(q) c E(q) + c c E + c g (5)

3 Research on Production Strategy with Carbon Eissions The Open Mechanical Engineering Journal, 2013, Volue 7 11 Apart fro Governent quotas, there are two kinds of carbon eission credits of access: if the purification is, and the quantity is, the cost is c, is the saving carbon eissions, that is, to CCS technology and purification treatent access unit cost of carbon eission savings: c If purchased fro the arket, unit procureent cost for carbon eissions: c. 4. MODEL ANALYSIS When the producers of carbon eissions levels is fixed, analysis of relationship between and, [ 0, E(q) ]: (1) if c < c, we can get > 0 fro the equation (5), has = E(q), is: CCS technology or purification processing way than arket purchase way cost ore low, or fro sold carbon eissions credit angle see is exists profit space, production Chaber of Coerce priority select CCS technology or purification processing all eissions real, insufficient part is fro trading arket purchased into, surplus part is put trading arket earned post. In this case, (4) should rephrase as follows: = ( 1 )E(q) (6) So: = qp(q) C(q) c (1 ) + c E(q) + c E (7) g Manufacturers ake optial decisions about yield q to axiize its profits. So: = p(q) + qp (q) q C (q) c (1 ) + c E (q) = 0 (8) Without loss of generality, consider this article linear inverse deand function, p(q) = K q, linear carbon eission E(q) = eq and linear cost function C(q) = q, which can produce optial production is: q = K e c (1 ) + c (9) 2 Under such optial production decision, anufacturer of carbon eissions and carbon eissions savings, obtained by trading carbon eissions balance or surplus in the arket, and the axiu level of profits, respectively: = eq = eq (10) = ( 1 )E( q ) = ( 1 )eq (11) = K ec ( 1 ) ec q q 2 + c (12) c (2) if = c, Enterprise way on carbon eissions and carbon eissions is equivalent to purchases in ters of cost-benefit of the arket, naely: take [0, E (q)] any value within the range, has no ipact on production enterprise incoe. So: = qp(q) C(q) c E( q)+ c = q(k q) q c eq + c (13) Optial conditions is: q = K 2 q ec = 0 (14) Optial yield under such circustances as: q = K ec 2 (15) is: = eq (16) (3) if c > c, < 0. is E E p onotone function p reduction, there will be = 0. Naely, anufacturers will not take or purification technology of CCS technology, all carbon eissions are direct eissions quotas is insufficient to eet production needs or if the Governent there is surplus, by buying or selling carbon eissions trading arket. In this case, the profit of enterprise is equation (13), so the best quantity is equation (15), and = eq = NUMERICAL ANALYSIS Fro the above analysis, the optial strategy of production Enterprise in different situations is shown in Table 1. If the governent quotas = 100, the inverse deand function of Products is: p(q) = q, per unit cost of production is: = 1, it can be calculated that the optial quantity of enterprise is 150, and the ax profit us 11250, without the restriction on carbon eissions. The Purification cost function of carbon eissions is c= For the further research on carbon eissions trading prices c and levels of carbon eissions purification paraeters which are ipacted on production strategy and optiize results, we focused on these two paraeters for sensitivity analysis. As shown by following Tables 2 and 3, results display: (1) With the reduction of carbon eissions trading price c, corporate profits decreased and then increased, purification levels gradually decreased until purification is not selected and all right to buy offset carbon

4 12 The Open Mechanical Engineering Journal, 2013, Volue 7 Tang and Song Table 1. Production Strategy of Enterprise Under Different Situations Variable Cost of No Restrictions on Carbon Eissions c Cost of Carbon Eission is Not Zero < c c = c c > c q K 2 q = K e c ( 1 )+ c ( ) 2 q = K ec 2 q = K ec 2 = eq [ 0,E(q) ] = eq = = ( 1 )eq = eq = eq ( K )q q 2 = K ec ( 1 ) ec q q 2 + c = q ( K q ) q c eq + c = q (K q ) q c eq + c q represents the optial production, represents the axiu level of profits, and E p represents the quantity of treated carbon eissions under the optial production, E s represents the quantity of the carbon eissions reduced by purification under the optial production, E represents the quantity of carbon eissions obtained through arket transactions under the optial production. Table 2. Sensitivity Analysis on the Volatility About the Carbon Eissions Trading Price on Business Decisions and the Optial Results c q q represents the optial production, represents the axiu level of profits, and E p represents the quantity of treated carbon eissions under the optial production, E s represents the quantity of the carbon eissions reduced by purification under the optial production, E represents the quantity of carbon eissions obtained through arket transactions under the optial production. Table 3. Sensitivity Analysis on the Purification Cost Paraeter on Business Decisions and the Optial Results q q represents the optial production, represents the axiu level of profits, and E p represents the quantity of treated carbon eissions under the optial production, E s represents the quantity of the carbon eissions reduced by purification under the optial production, E represents the quantity of carbon eissions obtained through arket transactions under the optial production.

5 Research on Production Strategy with Carbon Eissions The Open Mechanical Engineering Journal, 2013, Volue 7 13 eissions balance, while the finished product output has been growing in the State enterprises by selling excess eissions into buying eission rights (2) With falling corporate profits increased and then decreased, purification level fro scratch until gradually increase enterprise by buying eission rights into selling eissions rights. 6. CONCLUSION With the low carbon econoy developent of carbon eission rights gradually becae an iportant resource for enterprises, it will have a certain ipact on enterprise production and anageent decisions. This copany in carbon production anageent decision probles under the constraint of the right, the establishent of a carbon constrained optial production decisions and optial cleaning strategies and optial carbon trading strategy. The conclusion of this article is significant for the production decision of enterprises. But in the course of research for this article, product prices and carbon prices as exogenous variables to consider, not taking into account their randoness, in follow-up studies, you can further expand. In addition, this article is considered a single optial strategy aspect of a case, in subsequent studies could be considered when the deand for products, product prices and carbon when the price of a rando process, optial strategies of enterprises in different stages. CONFLICT OF INTEREST The authors confir that this article content has no conflict of interest. ACKNOWLEDGEMENTS Nature Science Foundation of Zhejiang Province (No:LY12G03002) Social Science Foundation of Zhejiang Province(No:12JCGL16YB). REFERENCES [1] B. Monica, and G. Frabcesco, Electricity pricing under carbon eissions trading : A doinant fir with copetitive fringe odel, J Energy Policy, vol. 35, no. 8, pp , [2] M. Kara, S. Syri, A. Lehtilä, S. Helynen, V. Kekkonen, M. Ruska, and J. Forsströ, The ipacts of EU CO2 eissions trading on electricity arkets and electricity consuers in Finland, J. Energy Econ., vol. 30, no. 2, pp , [3] A.G. Tsikalakis, and N.D. Hatziargyriou, Environental benefits of distributed generation with and without eissions trading, J. Energy Policy, vol. 35, no. 6, pp , [4] D. Daien, and Q. Philippe, European eission trading schee and copetitiveness: a case study on the iron and steel industry, J. Energy Econ., vol. 30, no. 4, pp , [5] D. Streiikiene, and I. Roos, GHG eission trading iplications on energy sector in Baltic States, Renewable Sustain. Energy Rev., vol. 13, no. 4, pp , [6] E. R. Knut, Incentives and prices in an eissions trading schee with updating, J. Environ. Econ. Manag., vol. 56, no. 1, pp , [7] B. Sundarakani, R. de Souza, M. Goh, S. Wagner, and S. Manikandan Modeling carbon footprints across the supply chain, Int. J. Prod. Econ., vol. 128, no. 1, pp , [8] S. Bode, Multi period eissions trading in the electricity sector winners and losers, J. Energy Policy, vol. 34, no. 6, pp , [9] S. Benjaafar, Y. Z. Li, and M. Daskin, Carbon footprint and the anageent of supply chains: Insights fro siple odels, University of Minnesota: USA, Working Paper, [10] M.I. Piecyk, and A.C. Mckinnon, Forecasting the carbon footprint of road freight transport in 2020, Int. J. Prod. Econ., vol. 128, no. 1, pp , Received: March 20, 2013 Revised: April 8, 2013 Accepted: April 8, 2013 Tang and Song Licensee Bentha Open. This is an open access article licensed under the ters of the Creative Coons Attribution Non-Coercial License ( which perits unrestricted, non-coercial use, distribution and reproduction in any ediu, provided the work is properly cited.