An analysis in production strategies with emissions cap regulation in global trade: production transfer versus remanufacturing

Governments have enacted a cap on greenhouse gas (GHG) emissions to protect the environment. Following this policy, producers may adopt one of the following two production strategies in global trade: (i) production of remanufactured products with recycled materials in a regulated region for emissions reduction or (ii) partial/full new products’ production transfer to an unregulated region for emissions leakage. However, the question of which production strategy is preferable remains unanswered. In this study, we use stylized models to investigate the optimal production strategy, in which a producer’s profits are maximized with a cap on GHG emissions. Our study shows that remanufacturing is the optimal production strategy for a producer if production must be completed in a regulated region. However, if production transfer is allowed, then remanufacturing is not consistently the optimal strategy. Specifically, when the emissions cap exceeds the threshold, partial production transfer is the optimal strategy. Furthermore, we find that remanufacturing can realize profit-environmental advantage, but partial production transfer cannot realize such an advantage as it generates high emissions in a regulated region. Thus, from economic and environmental perspectives, a producer should remanufacture products in a regulated region under certain conditions. Our results provide managerial insights into operations and production strategies to multinational enterprises that manufacture products with a large amount of GHG emissions.