Optimal Decisions of Carbon Emission Reduction and Production Pricing under Benchmarking Free Allocation of Carbon Permits

One of the commonly used modes for free carbon allocation permits in carbon cap and trade mechanism is benchmarking. For benchmarking mode,the key is to determine the optimal carbon emission per unit of product. This paper assumes that there are two decision-makers:the government and the enterprise. The government as a leader determines the optimal carbon emission value with the goal of social welfare maximization. Then the manufacturing enterprise as a follower determines the carbon emission reduction level and production pricing with the goal of profit maximization. By constructing a Stackelberg game model of maximizing government social welfare and maximizing enterprise profit,this paper discusses the setting of the government optimal carbon emission baseline and the decision of the enterprise optimal carbon emission reduction and production pricing.Results show that the government's optimal carbon emission benchmark is increasing in the government's carbon emission reduction target, the production cost per unit product, as well as the carbon emission and environmental impact when no emission reduction occurs. However, the benchmark is decreasing in consumers' low carbon awareness. The enterprise's optimal carbon emission reduction decision and product pricing decision are mainly affected by the government's carbon emission benchmark, the environmental impact cost per unit product when no emission reduction occurs,as well as the low carbon awareness of consumers.