Abstract: Currently researchers usually adopt expected utility theory to explore the firm's production decision under emission trading scheme with uncertainty. Considering the fact that the price uncertainty of emission permits is ubiquitous in existing emission trading schemes, primarily the prospect theory is introduced to make an intensive study on the firm's production decision under emission permits price uncertainty. To start with, the correlations between emission permits price and firm's decision-making behavior, including product output, emission reduction and permits trading, are extracted by establishing an optimization model for production decision under specific price of emission permits. Based on the above analysis, the value function, subjective probability and decision weight function of the firm's production decision under the situation of emission permits price uncertainty are analyzed and deduced, and a production decision model considering psychological reference point and decision preference using prospect theory is proposed. The results show that due to many factors such as the information limitations, resource endowments, psychological expectations and behavioral preferences, the firm's actual production decision will systematically deviate from the expected optimal production decision pattern. Numerical examples are presented to demonstrate the firm's complex decision-making behavior facing emission permits price uncertainty from many different aspects, such as psychological reference points, initial allocation of emission permits, standard deviation of emission permits price, and risk-attitude coefficients. The example analysis results are closer to the reality scenario, and fully demonstrate that the model based on prospect theory can be used to better describe the firm's actual production decision under emission trading scheme.

Key words: emissions trading, emission permits price, uncertainty, production decision, prospect theory