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Carbon tax based on the emission factor: a bilevel programming approach

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Abstract

We present a bilevel programming approach to design an effective carbon tax scheme based on the production emission factor, used as an intensity measure, for a competitive market with multiple players. At the upper level, the government sets a target emission factor for the industry and taxes firms if they exceed that target. At the lower level, the industry sets output levels that maximize social welfare. The bilevel model is transformed to a linear MIP by replacing the lower level optimization problem by its KKT conditions, and linearizing the complementarity slackness conditions. We test the model in the context of the cement industry. The results show that the proposed model finds the optimal tax rate that induces firms to switch to less carbon-intensive fuels and reduces the overall emissions.

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Authors and Affiliations

  1. Department of Management Sciences, University of Waterloo, 200 University West, Waterloo, ON, N2L 3G1, Canada

    Hossa Almutairi & Samir Elhedhli

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  1. Hossa Almutairi
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  2. Samir Elhedhli
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Correspondence to Hossa Almutairi.

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Almutairi, H., Elhedhli, S. Carbon tax based on the emission factor: a bilevel programming approach. J Glob Optim 58, 795–815 (2014). https://doi.org/10.1007/s10898-013-0068-8

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  • DOI: https://doi.org/10.1007/s10898-013-0068-8

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