<p>Previous researches have focused on cap-and-trade policy in various contexts, revealing that volatility in emission credit price poses a significant risk to both emissions trading markets and manufacturing/remanufacturing firms. However, none have addressed methods for hedging such risks. This study fills this gap by using carbon options to manage the risks associated with emission credit price volatility. Specifically, we examine an emissions-dependent manufacturer that also produces and sells remanufactured products under emission credit price volatility. We analyze the manufacturer’s optimal strategies and investigate how carbon options affects decisions regarding manufacturing, remanufacturing, and emissions reduction. We find that using carbon options can effectively hedge the risk of emission credit price fluctuation, leading to increased profits for manufacturers and enhanced consumer surplus. Additionally, we characterize the conditions under which the emissions reduction strategy incentivizes remanufacturing. Interestingly, under certain conditions, carbon options can motivate manufacturers to actively pursue emissions reduction efforts. Moreover, whether the emission credit price is exogenous or endogenous, the use of carbon options can benefit the manufacturer due to significant price volatility, but may simultaneously undermine incentives for emission reduction. However, the use of carbon options causes additional environmental impacts stemming from the increased total quantity of products. In this setting, adjusting the carbon option price or execute price upward can effectively mitigate environmental impacts, thereby achieving a balance among economic benefits, consumer surplus, and environmental concerns. Finally, we also show that using carbon options can enhance social welfare under a certain condition.</p>