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To Pool or Not to Pool in Carbon Quotas: Analyses of Emission Regulation and Operations in Supply Chain Supernetwork under Cap-and-Trade Policy

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Abstract

Carbon emission control and maintaining economic growth drive firms and governments to strike a balance between these two aspects via environmental policies. Inspired by diverse carbon permit trading practices, we study the impact of two variant cap-and-trade schemes on supply chain performance and emission reduction. Focusing on a realistic supply chain supernetwork, we examine the operational decisions and emission mitigations of the system under the carbon caps-pooling and caps-nonpooling schemes which reflect two typical modes of carbon quota in practice. We exploit game theoretical models to characterize the strategic interactions of supernetwork node firms, and then transform them into equivalent variational inequality problems to derive the associated equilibria in different scenarios. We find that the carbon caps-pooling scheme yields a win–win outcome in terms of the environmental and economic performance and the carbon permit sale price affects the decreasing rate of carbon intensity more effectively than the purchasing price. Moreover, the caps-pooling scheme further restrains firms’ opportunistic behaviors of lowering production and selling surplus carbon permits at a high price. Notably, comparing the two carbon schemes implies that under the cap-and-trade policy governments should stimulate firms adopt the caps-pooling scheme with emission permits trading, and accordingly firms have more flexible control over carbon permits. We further conduct computational analysis to validate and illustrate the results, which indicates the robust effect of caps-pooling scheme on the supply chain supernetwork under distinct market structures.

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Notes

  1. China has so far created seven carbon emission exchanges in cities like Beijing, and launched a national carbon market on July, 2021 (http://www.tanpaifang.com/tanjiaoyi/2021/0403/77338.html). There are other established exchanges, such as the European Union emissions Trading System (EU-ETS).

  2. In the first few years of the European Union Emissions Trading System (EU ETS) market, over-the-counter trading accounted for more than half of the total trading volume.

  3. https://www.huanbao-world.com/a/zixun/2018/0223/11929_7.html. In 2017, Beijing carbon emission trading platform generated 5,057,137 tons (RMB 112,808,310) of offline agreement transfer transactions, accounting for 67.16% (47.74%) of the total permits trading volume (value) of the whole year, an increase of 5.09% over the previous year.

  4. The set of four popular carbon regulations contains mandatory cap, cap and trade, carbon tax and carbon offset.

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Acknowledgements

The authors are grateful to the editors and anonymous reviewers for their constructive comments and suggestions that have helpfully improved the study. This work is partially supported by National Natural Science Foundation of China (NSFC) Grants (Nos. 92167206, 72091214, 91646118, 71701144) and The Science & Technology Pillar Key Program of Tianjin Key Research and Development Plan (20YFZCGX00640).

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Authors and Affiliations

  1. College of Management and Economics, Tianjin University, Tianjin, 300072, China

    Longfei He, Qinxu Gu & Xiao Zhang

  2. Department of Supply Chain Management and Information Systems, Rennes School of Business, 2 Rue Robert d’Arbrissel, 35065, Rennes, France

    Junsong Bian

  3. Industrial and Manufacturing Systems Engineering Department, Hong Kong University, Hong Kong, China

    Kin Keung Lai

  4. International Business School, Shaanxi Normal University, Xi’an, China

    Kin Keung Lai

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  1. Longfei He
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Appendix

Appendix

See Figs. 11, 12, 13, 14, 15, 16, 17 and 18.

Fig. 11
figure 11

The impact of carbon permit purchasing and sale prices on production quality in homogeneous market segments

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Fig. 12
figure 12

The impact of carbon permit purchasing and sale prices on suppliers’ emission in homogeneous market segments

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Fig. 13
figure 13

The impact of carbon permit purchasing and sale prices on manufacturers’ emission in homogeneous market segments

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Fig. 14
figure 14

The impact of carbon permit purchasing and sale prices on suppliers’ profits in homogeneous market segments

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Fig. 15
figure 15

The impact of carbon permit purchasing and sale prices on manufacturers’ profits in homogeneous market segments

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Fig. 16
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The impact of carbon permit purchasing and sale prices on system profit in homogeneous market segments

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Fig. 17
figure 17

The impact of carbon permit purchasing and sale prices on manufacturers’ emission rates in homogeneous market segments

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Fig. 18
figure 18

The impact of carbon permit purchasing and sale prices on carbon intensity of profit in homogeneous market segments

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He, L., Gu, Q., Bian, J. et al. To Pool or Not to Pool in Carbon Quotas: Analyses of Emission Regulation and Operations in Supply Chain Supernetwork under Cap-and-Trade Policy. Ann Oper Res 324, 311–353 (2023). https://doi.org/10.1007/s10479-022-04724-1

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