Partial capacity retrofitting and production under carbon policies with a non-monotonous emission abatement cost

Abstract

As industrial activities contribute significantly to global CO2 emissions, firms face increasing pressure to adopt low-emission clean technologies. This paper investigates optimal strategies for firms to partially retrofit existing technologies and adjust production under various carbon policies, including scenarios without emission regulation, carbon taxation, and cap-and-trade systems. We propose a novel non-monotonic emission abatement cost function that captures both operational cost increases and resource savings associated with emissions reductions. By analyzing these three emissions regulation regimes, we demonstrate that the external pressures of carbon policies and the internal incentives for resource savings play a critical role in shaping a firm’s retrofitting and production decisions. Numerical experiments support these findings, highlighting the importance of maintaining stable carbon policies to facilitate effective emission reductions.