Decision and Performance Analysis of a Price-Setting Manufacturer with Options under a Flexible-Cap Emission Trading Scheme (ETS)

Abstract

An Emission Trading Scheme (ETS) is widely considered to reduce carbon emissions and achieve sustainability. Unsatisfactory results of European Union Emission trading scheme (EU ETS) make China’s government propose a flexible-cap ETS system to overcome its weakness. This research is the first one introducing the flexible cap to limit the manufacturing carbon footprint. Current research on emission reduction primarily focuses on introducing option contracts to better develop the carbon market, with little consideration of the effectiveness of these contracts on the manufacturer’s optimality facing demand risks. This research fills this research gap by using call option contract to reduce the emission costs for a price-setting manufacturer under the flexible ETS. Newsvendor models are built to investigate the behaviours and performances of manufacturers, with a call option contract when the price-driven demand is uncertain. The joint emission ordering and product pricing problem is solved by three emission ordering policies: the non-option, only option, and mixed emission ordering policy. Analytical and numerical studies have shown that the mixed policy outperforms the others in profitability, and the only option policy provides more flexibility but poor profitability. Furthermore, the mixed ordering policy better protects against price volatility and stringent emission restrictions. Managerial insights help emission-dependent manufacturers to manage their carbon assets for better survival in an increasingly stringent emission market. This paper investigates the effectiveness of the option contract on manufacture optimality in the flexible-cap ETS system, in which the joint emission ordering and production pricing problem under demand uncertainty is solved by the newsvendor model.

Pengaruh Eksekutif Wanita, Struktur Modal, Dan Pertumbuhan Laba Terhadap Financial Distress

“…Kondisi financial distress entitas dimaknakan sebagai kondisi hasil usaha entitas tidak mencukupi untuk menutup utang entitas (Agita dan Sari, 2022). Menurut Wang, et. al., (2018) mendefinisikan financial distress adalah kondisi yang membuat industri tidak memiliki kemampuan untuk memenuhi kewajiban liabilitasnya karena ketidakcukupan arus kas operasi yang dimiliki industri.…”

“…Debt to equity ratio (DER) diterapkan untuk pengukur struktur modal. DER untuk bagian dari rasio solvabilitas yang berguna untuk menakar antara kewajiban dengan modal yang dimiliki sendiri (Wang, et. al., 2018).…”

“…Indikator yang dapat digunakan industri untuk mengetahui bermanfaatnya manajemen industry dapat diketahui dari hasil pengembalian atas investasi dan juga penjualan industri tersebut yang terdapat pada profitabilitas. Industri yang memiliki perkembangan laba yang baik pada setiap periode menjadi sinyal positif yang berarti industri memiliki kinerja yang baik sehingga memiliki keberlanjutan usaha dimasa yang akan datang dan membuat industri dapat tumbuh serta memiliki kemampuan dalam memenuhi liabilitasnya (Wang, et. al., 2018).…”

Assessment of the impact of the usage of derivatives on the company’s value

“…For example, Wybieralski (2020), in a paper on the application of cross-currency-interest rate swaps in long-term currency risk management, emphasized that the analyzed measure meets expectations in the context of the company's (manufacturer's) cash flow hedging, and can also generate additional benefits due to the still-existing interest rate differential (Wybieralski, 2020). S. Wang et al (2018) examine the effectiveness of an option contract for production optimization in the Emissions Trading System. The flexibility afforded by options allows the producer to benefit more from higher demand risk, even in a tightly constrained emissions market.…”

A Flexible Cap-and-Trade Policy and Limited Demand Information Effects on a Sustainable Supply Chain

“…Its carbon permits allocation methods mainly include paid allocation and free allocation, and free allocation is mainly divided into the grandfathering method and the benchmarking method [6,7]. However, the grandfathering method has some disadvantageous in practice from, for example, more emissions obtaining more allowances and not applying to newly established companies [8]. On the contrary, the benchmarking method, which compensates for the above disadvantages, has the advantage of flexibility, such as timely adaptation to the adjustment of the production capacity [9].…”