Optimal responses to two carbon pricing policies: carbon tax and emission intensity regulation

In response to global climate change challenges, both carbon taxes and emission intensity regulations are popular carbon pricing policies implemented in countries worldwide. These two carbon policies may impact industries differently, specifically the electricity and manufacturing sectors. This paper aims to investigate the optimal response of two industrial sectors to these carbon policies. The economic model is first calibrated by the cost structures, emission profiles, and market conditions typical of the two sectors. The equilibrium that captures the optimal production and abatement of firms is then given. In addition, by analysing the best response of industrial participants, insights for policymakers on effective carbon policies are provided in balancing environmental goals with economic considerations. Results reveal the significant influence of carbon pricing policies on industry profits, highlighting the need for tailored approaches for different sectors. Future research could explore the long-term effects of these policies on industry competitiveness and sustainability, informing ongoing policy development efforts.