Carbon emission reduction decisions of supply chain members under cap-and-trade regulations: A differential game analysis

https://doi.org/10.1016/j.cie.2021.107711Get rights and content

Highlights

  • Carbon emission reduction between a manufacturer and a supplier are modelled.

  • Cooperation among the supply chain can raise profits and reduce carbon emissions.

  • The two-way coop contract along the supply chain is designed in a dynamic setting.

Abstract

A global consensus has been reached that carbon emission reduction is now an inevitable social trend. A manufacturer can reduce its direct carbon emission by itself and indirect carbon emission by cooperating with suppliers. In a low-carbon context, we investigate a detailed model that combines cap-and-trade regulations with the low-carbon preferences of consumers. In this research, differential game models are developed to study the emission reduction decisions of two supply chain members under three scenarios: (1) a non-cooperation (coop) scenario where the manufacturer makes a decision on its level of effort in carbon emission reduction and the supplier is followed; (2) a coop program scenario in which the supplier’s emission reduction efforts are supported by the manufacturer; and (3) a two-way coop contract scenario in which both supply chain members support each other’s emission reduction efforts. A comparative study is conducted on supply chain members’ carbon emission reduction efforts and optimal profits obtained under the above scenarios. The results indicate that under the two-way coop contract scenario, both supply chain profits and emission reduction levels are the largest, with the greatest efforts made by channel members. In contrast to the non-coop scenario, both firms make more emission reduction efforts and earn more profits under the coop program scenario.

Introduction

Due to the rapid process of modernization and urbanization, environmental problems like global warming gain more attention from the international community (Jiang & Shao, 2014). In addition to a great deal of energy consumption, carbon emissions are the main reason for global warming. Nowadays, an increasing number of countries have realized the great importance to this issue and attended to achieving the target of climate neutrality in the next 30–40 years. For example, at the UN General Assembly held in September 2020, President Xi Jinping announced the goal that China will achieve the carbon peak by 2030 and become carbon–neutral by 2060. Moreover, in order to achieve climate neutrality, The European Union (EU) also declared its 2050 Long-term Strategy for Greenhouse Gas (GHG) emission reduction. To accomplish the carbon reduction task, many countries have applied relevant mechanisms and legislations to reduce carbon emissions. Due to their advantages in implementation and flexibility, cap-and-trade regulations are considered an efficient tool that countries can depend on for carbon emission control (Ghosh & Shah, 2012). To date, there are more than 11,000 firms in 31 different countries that are covered by the EU emissions trading scheme. As the largest carbon emitter worldwide, China has launched eight carbon trading pilot projects since 2013, and it established a national carbon trading platform in 2017.

Meanwhile, faced with growing carbon emissions and climate change, an increasing number of consumers understand the importance of low-carbon products, including products that produce low carbon emissions along their life cycles. Previous studies indicate that low-carbon products are preferred by consumers who have an obvious preference (Geng et al., 2017, Liu et al., 2018, Zhu et al., 2013), and thus firms are motivated to invest in low-carbon production and reduce carbon emissions along the products’ life cycles (He et al., 2021).

In order to reduce direct and indirect carbon emission under the context of climate neutrality, manufacturers have taken actions through supply chain management to cut down carbon emissions of production not only for themselves but also for their suppliers. Taking the low-carbon preferences of consumers and environmental policies into account, multinational enterprises, such as HP, Haier, Walmart, and P&G, have integrated sustainable development and low-carbon environmental protection into their brand operations and corporate social responsibility efforts (Du et al., 2017). For example, to reduce its carbon emissions and strengthen its competitiveness, Haier has focused on design and innovation for low-carbon products (Ji et al., 2017). From a supply chain perspective, the combined output of all the operational procedures involving supply chain members and of the use stage of consumers constitutes the carbon footprint of a product. Benjaafar et al. (2013) investigated enterprises’ low-carbon decisions under different environmental regulations and pointed out that carbon emission reduction requires all channel members’ cooperation(coop). Under this trend, to improve competitiveness and to meet the requirements of downstream enterprises, suppliers tend to adopt low-carbon strategies such as investments in low-carbon technology or the production of low-carbon materials/components. Supported by its material supplier, BASF, Haier has developed a new production line for refrigerators that could reduce the energy consumption of products in the use phase, which in turn could lower the final emissions of products. In addition to promoting the efficiency of transportation and storage, suppliers can contribute to making better environmental performance of the supply chain (P&G, 2013). Furthermore, to reduce upstream carbon emissions, Walmart has incorporated sustainability into its supply chain operations and is cooperating with its suppliers (Du et al., 2017, Liu et al., 2018). However, firms’ carbon emission reduction represents one dynamic and long-term procedure. Consumer choices and decision-making in later stages are influenced by carbon emission reduction decisions for products made in prior stages (Zu et al., 2018). Thus, such a dynamic process of carbon emission reduction should be considered (Benchekroun & Martin-Herrian, 2016).

Considering the background described above, cap-and-trade regulations, and the low-carbon preferences of consumers, this paper explores supply chain members’ low-carbon decisions, including efforts in carbon emission reduction and a cooperative support rate in a dynamic setting. Furthermore, we formulate the following research questions:

(1) In accordance with cap-and-trade regulations, what decisions should supply chain members make on carbon emission reduction from a long-term perspective?

(2) How does a coop program affect firms’ low-carbon decisions and their profits?

(3) Under the circumstances mentioned above, is it possible for a two-way coop contract to realize supply chain coordination?

To address these research questions, we use differential game models to investigate the low-carbon decisions of a supplier and a manufacturer in the supply chain. In this model, both firms can contribute to lower unit product carbon emissions. Moreover, managed by cap-and-trade regulations, the manufacturer can sell more products with lower unit product carbon emissions. First, we explore low-carbon decisions and profits among channel members under a dynamic environment. Second, considering a coop program, we analyze the manufacturer’s cooperative support decision, efforts in carbon emission reduction of the channel members, and profits. Then, a two-way coop contract is proposed. Ultimately, we make comparisons of the optimal decisions on the carbon emission reduction efforts and firms’ profits under three scenarios. This study has three key contributions. First, combining cap-and-trade regulations and the low-carbon preferences of consumers, we develop differential game models to explore the long-run low-carbon decisions made by supply chain members under three scenarios. Second, we propose one two-way coop contract which can perfectly coordinate the supply chain system. Third, based on the effects of the coop program and the two-way coop contract on firms’ decisions and profits, we reveal the optimal decisions for profits maximization which can be associated with carbon emission reduction. The results show that both firms make increasing carbon emission reduction efforts when the non-coop scenario, the coop program scenario and the two-way coop contract scenario are sequentially introduced. Moreover, compared with the non-coop scenario, both firms may make a Pareto improvement in profits through the coop program. In summary, our paper provides managerial insights for supply chain managers regarding how to formulate long-run decisions concerning carbon emission reduction efforts combined with cap-and-trade regulations and the low-carbon preferences of consumers.

The paper is structured as follows. Section 2 presents the literature review, and Section 3 explains the models and assumptions. In Section 4, theoretical results of the integrated supply chain are analyzed. Section 5 formulates differential game models under different scenarios and proposes a two-way coop contract. In Section 6, comparisons of the different scenarios are presented. Section 7 interprets in detail a numerical analysis. Section 8 draws the conclusions and suggests future directions.

Section snippets

Literature review

The following section will review the studies that are closely relevant to our research. These studies fall into three categories, namely, operational decisions subject to cap-and-trade regulations, the low-carbon preferences of consumers, and differential game models.

Model description and assumptions

This section considers a supply chain composed of a supplier and a manufacturer. Furthermore, covered by cap-and-trade regulations, the manufacturer is the Stackelberg leader responsible for final product production and sales, while the supplier becomes a follower that provides energy, materials or components. From the view of life cycle accounting of products by the manufacturer, both the manufacturer and the supplier are carbon emitting contributors that can make efforts to lower carbon

Model for an integrated supply chain

Under an integrated supply chain, channel members must unify their interests and realize the maximization of the supply chain profit as planned. Coop should be realized through an integrated supply chain if there is just one decision-maker. Assuming a positive discount rate r and an infinite time horizon, we formulate the following objective function for the supply chain:JI=0e-rt(ρS+ρM)[D0+wG(t)]+pcF(t)-12θSeS(t)2-12θMeM(t)2dt

Let VIdenote the decision maker’s value function. Furthermore, we

Model for a decentralized supply chain

First, we study the channel members’ optimal profits and low-carbon decisions with a non-coop program. Second, we incorporate a coop program into the manufacturer’s decision-making process and talk about the impact of such a program on the profits and decisions on low-carbon of the channel members. Finally, we suggest a two-way coop contract to coordinate the supply chain in a dynamic setting.

Comparisons between different scenarios

In this section, to evaluate the environmental and economic influences of different coop programs, we perform a comparative analysis of the results obtained from Section 5. Specifically, we compare the emission reduction efforts, emission reduction levels and optimal profits under different scenarios. Then, we may obtain the following propositions.

Proposition 6.

The supplier’s optimal emission reduction efforts under different scenarios satisfy eSN<eSC<eSI=eST.

Proposition 6 indicates that the supplier’s

Numerical analysis

The following section performs a numerical analysis to examine the impact of critical parameters. In order to verify the obtained results and make sure that the simulation results are reasonable (0G(t)<1), we designed the parameter values used in this paper by learning related research (Xia et al., 2018, Xia et al., 2020). Specifically, we set the parameter values as shown in Table 2.

Conclusions

Subject to cap-and-trade regulations, firms’ operational strategies have been studied by researchers from the supply chain perspective. However, the long-term joint emission reduction actions of the channel members in a dynamic setting have yet to be further examined. Taking into account the low-carbon preferences of consumers and cap-and-trade regulations, our study establishes differential game models to investigate the low-carbon decisions made by supply chain members and their corresponding

CRediT authorship contribution statement

Yilei Wang: Conceptualization, Methodology, Writing – original draft. Xin Xu: Methodology, Software. Qinghua Zhu: Supervision, Writing – review & editing.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgments

This paper was supported by the National Natural Science Foundation of China (71602020, 71632007, 71690241).

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