Production mode choice under carbon tax

We analyze two production ways of manufacturers: costly green production and less expensive non-green production. The former emits less green house gas, while the latter does more harm to global warming. We suppose there are three possible production strategies for a manufacturer: low cost production, dual production, and green mass market production. With an assumption that “green” consumers are willing to pay a higher price for a product produced in the green way, we derive the condition under which each strategy is optimal and come to conclusions that efforts intended to increase consumers' willingness to pay for green products or increase the number of green consumers may lead to unanticipated outcomes, such as a rise in carbon emission. By contrast, efforts that focus on policies imposed on manufacturers, such as higher carbon tax, can lead to reduced carbon emission and increased green production.