The Effect of Optimism on Competitive Manufacturers under Carbon Cap-and-Trade Policy

With strengthening carbon regulations, manufacturers are facing great pressure to reduce carbon emissions. Manufacturers, as a critical role in the carbon emission reduction process, seem to overestimate consumer environmental awareness when conducting carbon reduction investments. Considering this optimistic bias about consumer environmental awareness (i.e., optimism), we formulate a duopoly model consisting of two competing manufacturers each of which produces both traditional product and environment-friendly product and invests in carbon emission reduction under the carbon cap-and-trade policy. Each manufacturer is either realistic or optimistic. We derive equilibrium results under four different types of combinations. We find that the optimistic manufacturer always invests more in carbon emission reduction. Further, through numerical analysis, we find that when the average level of CEA is below a specific level, the optimistic manufacturers optimal demand of e-product is lower than that of the realistic manufacturer. We also show that when the average level of CEA is extremely high, relative to bilateral reality, the optimistic side is better whereas the realistic side is worse under unilateral optimism.