The effects of emission trading on production and inventories in the Arrow-Karlin model

The paper deals with the effect of introduction of tradable permits on the production-inventory strategy of a firm. It is assumed that the firm will minimize its costs. The cost function consists of linear holding and convex production costs. After introducing emission trading, the cost function will contain a linear emission procurement/selling cost. We will compare the optimal production-inventory strategy before tradable permits and thereafter. The mathematical investigation is based on the well-known dynamic Arrow-Karlin model.