The effect of emission permit trading with banking on firm's production-inventory strategies

We investigate the effect of tradable emission permits with banking on the production-inventory strategy of a firm in this paper. The basis of the work is the well-known Arrow-Karlin dynamic production-inventory model, in which the inventory holding costs are linear, and production costs are non-decreasing and convex functions of the production level. The cost of environmental protection is taken into account in the model. We assume there is an emission trading program, with which firms are able to purchase their emission rights or sell them, and the rights are allowed to be deposited in intertemporal trading. We compare the optimal production-inventory strategies of this paper with those without emission permits.