TY - JOUR
T1 - A Newsvendor Approach to Compliance and Production under Cap and Trade Emissions Regulation
AU - Manikas, Andrew S.
AU - Kroes, James R.
N1 - Manikas, Andrew S. and Kroes, James R.. (2014). "A Newsvendor Approach to Compliance and Production under Cap and Trade Emissions Regulation". International Journal of Production Economics, 159, 274-284. http://dx.doi.org/10.1016/j.ijpe.2014.09.010
PY - 2015/1/1
Y1 - 2015/1/1
N2 - Since the 1990s, governmental agencies have increasingly turned to market based cap and trade programs to control the emission of pollutants. Firms subject to cap and trade regulation are typically required to acquire emissions allowances via open auction markets. The cost to acquire allowances may impose a substantial financial burden on a firm. While emissions reduction efforts may eliminate some firm's need to acquire additional allowances, there are still numerous firms that need to purchase additional allowances on the open market. This study presents a new forward buying heuristic, designed for those firms that need to purchase emissions allowances via auctions, which reduces the impact of emissions allowance acquisitions on the firms' financial performance. The heuristic, designated as the Newsvendor Production Planning with Emissions Allowance Forward Buying (NPPAFB) method, applies a forward buying algorithm to determine the number of periods for which to forward buy allowances, the current production order up to level, and the current and future emissions allowance requirements (which serves as the order up to level for allowance purchases). Additionally, NPPAFB also authorizes unused emissions allowances to be sold when market conditions are favorable. Compared against three existing production planning and allowance procurement strategies, a simulation exercise finds that the NPPAFB method significantly reduces a firm's emissions allowance expenditures. These results indicate that heuristic can be readily adopted by any firm that is required to procure emissions allowances via open markets in an effort to improve the firm's profitability.
AB - Since the 1990s, governmental agencies have increasingly turned to market based cap and trade programs to control the emission of pollutants. Firms subject to cap and trade regulation are typically required to acquire emissions allowances via open auction markets. The cost to acquire allowances may impose a substantial financial burden on a firm. While emissions reduction efforts may eliminate some firm's need to acquire additional allowances, there are still numerous firms that need to purchase additional allowances on the open market. This study presents a new forward buying heuristic, designed for those firms that need to purchase emissions allowances via auctions, which reduces the impact of emissions allowance acquisitions on the firms' financial performance. The heuristic, designated as the Newsvendor Production Planning with Emissions Allowance Forward Buying (NPPAFB) method, applies a forward buying algorithm to determine the number of periods for which to forward buy allowances, the current production order up to level, and the current and future emissions allowance requirements (which serves as the order up to level for allowance purchases). Additionally, NPPAFB also authorizes unused emissions allowances to be sold when market conditions are favorable. Compared against three existing production planning and allowance procurement strategies, a simulation exercise finds that the NPPAFB method significantly reduces a firm's emissions allowance expenditures. These results indicate that heuristic can be readily adopted by any firm that is required to procure emissions allowances via open markets in an effort to improve the firm's profitability.
KW - allowance trading
KW - cap and trade regulation
KW - emissions
KW - environmental compliance
KW - forward buying heuristic
UR - https://scholarworks.boisestate.edu/itscm_facpubs/42
U2 - 10.1016/j.ijpe.2014.09.010
DO - 10.1016/j.ijpe.2014.09.010
M3 - Article
JO - IT and Supply Chain Management Faculty Publications and Presentations
JF - IT and Supply Chain Management Faculty Publications and Presentations
ER -