Optimal Policy for Remanufacturing Firms with Carbon Options under Service Requirements

This paper studies the procurement management of carbon financial instruments and the production decisions for an emission-dependent remanufacturing firm under service requirements. In the presence of demand uncertainty, carbon emission options are introduced to hedge risks for the firm who purchases carbon financial instruments under a cap-flexible emission trading scheme (ETS) and then conducts remanufacturing. We develop three optimization models to determine the optimal remanufacturing quantity (procurement quantity of carbon financial instruments) maximizing the firm’s expected profit under three contracts: a pure wholesale price contract, a pure carbon option contract, and a portfolio contract. Through analyses and comparisons of optimal solutions, we demonstrate the values of introducing carbon options and committing to service levels for the firm. Compared with the other two pure contracts, the portfolio contract makes the firm better off. However, high service requirements may lead to a profit loss to the firm. We generalize to the cases when the yield rate is dependent on the quality of used products, when the yield is stochastic, and when carbon price performs volatility. Discussion of these extensions illuminates how the variability of used product quality, yield rate and carbon price influences the firm’s performances.