Green Technology Investment Strategies Under Cap-and-Trade Policy

This article aims to address methods for reducing carbon emissions by investigating the green technology investment behavior of enterprises under cap-and-trade regulation and governments’ cap-and-trade policy design mechanisms. Considering that investments are long-term, we developed a two-period green technology investment model for a manufacturing firm facing carbon-sensitive demand in a cap-and-trade regulated market. Our findings show that the firm's investment strategy depends on trade-offs between the gains from selling low-carbon products and the costs of investing in technology. Such trade-offs are affected by consumers’ carbon emissions sensitivity, the unit carbon emission trading price, and the firm's investment efficiency across two periods. The first-period optimal free allowance allocated to the manufacturer is unique, but the second-period optimal free proportion is not unique as it is decided by the unit carbon emission trading price. In addition, the firm's chosen investment strategy based on the optimal carbon policies can create a mutually beneficial situation for the manufacturer, consumers, and society, which shows that the government-designed carbon policies, including the first-period free emissions allowance and the second-period free proportion, are effective. Our study results can aid manufacturers in making wise, strategic, and operational decisions about green technology investment and provide guidance on carbon quota allocation policies that promote the development of low-carbon economies.