Premium
Joint Control of Emissions Permit Trading and Production Involving Fixed and Variable Transaction Costs
Author(s) -
Yuan Quan,
Chen Youhua Frank,
Yang Jian,
Zhou Yun
Publication year - 2018
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.12875
Subject(s) - heuristics , exploit , production (economics) , convexity , variable (mathematics) , transaction cost , control (management) , purchasing , fixed cost , database transaction , variable cost , trading strategy , microeconomics , computer science , economics , business , industrial organization , operations management , finance , computer security , mathematical analysis , mathematics , artificial intelligence , programming language , operating system
The use of permit markets to mitigate harmful emissions is on the rise. When participating in such a market, an emitting firm needs to acquire from it permits that cover emissions resulting from production. Thus, it has to simultaneously cope with fluctuating permit prices and random demand, and also juggle between the activities of permit trading and permit‐consuming production. We shed light on this complex dynamic control problem, while confronting difficulties brought on by fixed as well as variable transaction costs associated with permit trading. We exploit K ‐convexity variants that are suitable for two‐dimensional control, and achieve the partial characterization of optimal control policies. When the selling of permits is prohibited, we prescribe an ( s , S )‐type permit purchasing policy. For the more general case involving two‐way trading, we find it optimal to carry out trading in a three‐interval fashion. Heuristics, including one based on the uncoupling of trading and production activities, are introduced. Their effectiveness has been illustrated in computational studies.