Is Price Commitment a Better Solution to Control Carbon Emissions and Promote Technology Investment?

Given the difficulty to reach a global quantity commitment to control the carbon emissions, a globally uniform price commitment is proposed to tackle the current environmental issues. In this paper, we take an operations perspective to understand the impact of both the cap-and-trade policy (quantity commitment) and the carbon tax policy (price commitment) on a firm's technology investment and production decisions.We show that under the cap-and-trade policy, with the uncertainty of the future emission price, the firm could flexibly adjust its production quantity to enhance its profit. Hence, the firm has low incentives to invest in clean technology. However, as the enhancement of the correlation relationship between the sales market and the permit trading market, the profit driven from the production flexibility is weakened so that the firm has to increase its technology investment to hedge against the future risk of a high emission price. Making a comparison between the cap-and-trade \emph{and} the carbon tax policies, we find that when the correlation is moderate, the carbon tax policy generates a multi-win situation (i.e., higher expected profit and consumer surplus, more technology investment, and less carbon emissions). To check the robustness of our results, we investigate the cases with competition, with a marginal production cost which depends on the technology level, and with restricted production flexibility. Overall, this study explores the interactions between the carbon policy and the firm's operational decisions. Through examining the influence of carbon policy on four measurements, our analysis provides meaningful insights for carbon policy design