Implications of a cap-and-trade system for emission reductions under an asymmetric duopoly

Climate change is a global problem causing wide concern and requiring workable solutions. The cap-and-trade system is recommended as a workable mechanism to reduce the emissions of enterprises and a popular policy affecting production and the environment. This article considers market power and studies the effects of a cap-and-trade system on the performance of companies and environmental protection under an asymmetric duopoly. A two-step model was established to analyze the outputs, prices, and emission under the cap-and-trade system. The result indicates that the cap-and-trade system has significant implications for cleaner production. More precisely, the optimal emission cap is feasible with the function of social welfare. Both a low emission cap and high emission trading price are beneficial for promoting the development of sustainability. Moreover, the market value of the cap-and-trade system offers a huge incentive to companies emitting carbon dioxide. In particular, inefficient firms have a greater stimulus than efficient ones to reduce emissions to economize the cost of production. In summary, the cap-and-trade system makes a great contribution to the development of smart business.