Environmental resource planning under cap-and-trade: models for optimization

Under the conditions of a Cap-and-Trade (C&T) program, manufacturers are restricted in total greenhouse gas emissions but allowed with options to acquire (and dispose) environmental resource (e.g. certified emission quota (CEQ) or commercialized permit for emission of certain pollutant) via a market system, or conduct self-purification (SP) to reduce emission level to satisfy their overall emission needs due to production or service activities. This paper analyzes the operational decisions of production systems under Cap-and-Trade conditions, in which the problem is modeled as a multi-stage dynamic optimization problem. For each planning period, the model specifically addresses the decisions on purchasing CEQ, reducing emission via SP, and carrying over surplus emission quota (SEQ) to meet the required emission level (driven by production demand) for the period. It also makes sure that the sum of reduced emission over the whole planning horizon meets exactly a goal of emission reduction specified at the manufacturers' discretion. Other important problem characteristics addressed include the unit cost for reducing emission level via SP to reflect the fact that the cost increases as accumulated emission reduction increases, i.e. “the more reduced, the more difficult to reduce”, and time-related cost associated with green investment for emission reduction, e.g. interest cost of short term loans. These characteristics make the model and related analysis useful for both practitioners and researchers in this area. Numerical experiments were designed and carried out to verify and validate the proposed concepts.