Low-carbon production with low-carbon premium in cap-and-trade regulation

Manufacturers face a choice of whether to reduce their carbon emissions through employing low-carbon technologies. Though many carbon regulations are set up to curb carbon emissions, some firms choose not to take low-carbon production because the additional cost of low-carbon progressing is high. However, low-carbon production would be a better alternative when we consider consumer's low-carbon premium in the cap-and-trade system. In this work, we solve the manufacturer's multi-product joint pricing and production problem when consumers value the low-carbon product higher than the ordinary product. Our findings provide firms with conditions where low-carbon production is profitable. Furthermore, we find that the cap-and-trade would constrain the total carbon emissions and promote low-carbon production simultaneously under certain conditions.