Optimal decisions in two-echelon supply chain under hybrid carbon regulations: The perspective of inner carbon trading

https://doi.org/10.1016/j.cie.2022.108699Get rights and content

Highlights

  • Optimal carbon emission reduction, production, and pricing decisions are derived.

  • Four different carbon trading cases are considered.

  • Inner carbon trading cannot always benefit the environment.

  • Important factors may lead to the transformation of the inner carbon trading case.

Abstract

With the widespread use of carbon tax and cap-and-trade regulation, the coexistence of hybrid carbon regulations is becoming the trend. Under hybrid carbon regulations, considering consumers’ low-carbon preferences and carbon trading within the supply chain, a two-echelon supply chain consisting of one leading manufacturer and one supplier is proposed. Based on different carbon permit constraints, we derive optimal decisions in four different carbon trading cases. Then, we conduct the comparison and sensitivity analysis. The result indicates that (1) Inner carbon trading may not affect manufacturer’s production and carbon emission reduction (CER) decisions, but it always affects the supplier’s wholesale price. (2) Inner carbon trading can benefit the environment only when the manufacturer’s surplus permits are insufficient. In other inner carbon trading cases, the impact on the environment is equal to that in the outer carbon trading case. (3) The increase in consumers’ low-carbon preference can promote the manufacturer’s CER and members’ profits, but it also leads to an increase in total carbon emissions. To control total carbon emissions, the government can increase the carbon tax or outer carbon trading price. (4) For given carbon permits, changes in important parameters may lead to the transformation of inner carbon trading cases, which causes huge fluctuations in members’ profits. Finally, we provide valuable managerial insights for the government and supply chain members.

Introduction

Global warming has received widespread attention in recent years. Since Kyoto Protocol and The Paris Agreement, many countries have begun to strictly control the emission of carbon and other greenhouse gases. Purchasing, production, and transportation activities in the supply chain are the main sources of carbon emissions (Konur et al., 2017, Mota et al., 2018). Therefore, effective carbon emission reduction (CER) in the supply chain is the key to combating global warming, and the government has already set up relevant carbon regulations.

Among these regulations, carbon tax regulation and cap-and-trade regulation are the two most popular carbon-control regulations. Under the carbon tax regulation, enterprises need to pay carbon taxes based on total carbon emissions during the production process (Chen & Hao, 2015). Among European countries, France has implemented the carbon tax regulation since 2009 (Bureau, 2011), while Norway and Sweden used carbon tax to control carbon emissions as early as 1991 (Waltho, Elhedhli, & Gzara, 2019). Besides the carbon tax regulation, the cap-and-trade regulation is also an effective way to control carbon emissions (Wang & Wang, 2015). With the success of EUETS and UKETS, China has followed their step and established seven carbon trading markets in Beijing, Tianjin, Shanghai, and other provinces, and the trading amount exceeded 1.1 billion yuan in 2017. In fact, in the current environmental situation, it is rather difficult for the government to achieve the carbon reduction target only by a single carbon regulation, and hybrid carbon regulations are becoming the trend. For example, China also imposed a carbon tax on air pollution enterprises at the price of 0.17 dollars in 2018 (Wesseh & Lin, 2018). Zhou et al. (2020) also pointed out that supply chain research under hybrid carbon regulations is the future direction of the low-carbon supply chain. Therefore, this paper considers hybrid carbon regulations.

At the same time, consumers show increasingly low-carbon preferences (Ilgin and Gupta, 2010, Vanclay et al., 2010), and they prefer to purchase low-carbon products. For example, the energy label is widely applied in China to help consumers identify the low-carbon information of the product. Therefore, consumers’ low-carbon preference is also an important factor influencing CER in the supply chain. Additionally, based on the rule of cap-and-trade regulation, the government allocates carbon permits to supply chain members based on the ‘Grandfather’ method, and carbon permits can be purchased or sold in the carbon trading market. Especially, carbon trading can also occur within the supply chain, and supply chain members can purchase carbon permits at a lower price than in the outer carbon market (Wang, 2011, Wang et al., 2018). To better distinguish the above two different carbon trading, the carbon trading within the supply chain is expressed as inner carbon trading, and the other one is expressed as outer carbon trading.

In this paper, considering hybrid carbon regulations and low-carbon preference, we are interested in the impact of inner carbon trading on optimal decisions. We first establish a two-echelon supply chain model with one manufacturer and one supplier. To ensure the possibility of inner carbon trading, we assume that the leading manufacturer has surplus carbon permits after CER, while the upstream supplier always lacks carbon permits. That is because in high emission industries like steel and cement, upstream suppliers are more likely to lack carbon permits (Cheng, Mu, & Zhang, 2017). Moreover, due to carbon permit constraints faced by the manufacturer and the supplier, we consider different cases of inner carbon trading in our model. The key problems in this paper are as follows:

  • (1)

    Under the joint influence of hybrid carbon regulations and low-carbon preference, how do supply chain members make optimal decisions under different carbon trading cases?

  • (2)

    Compared with the outer carbon trading case, how do optimal decisions and profits of supply chain members change in inner carbon trading cases?

  • (3)

    Whether inner carbon trading is more beneficial to the environment than the outer carbon trading case?

  • (4)

    How do the carbon tax, inner and outer carbon trading prices, and consumers' low-carbon preferences affect optimal decisions and profits in different carbon trading cases?

The remainder of this paper is as follows. Section 2 reviews the relevant literature. Section 3 explains the notations and basic assumptions in the model. In Section 4, we consider four different carbon trading cases and derive the optimal decisions in each case. Then, in Section 5, we compare the optimal solutions in different cases. In Section 6, we analyze the impacts of carbon regulations and consumers' low-carbon preference on optimal decisions and members’ profits, and numerical examples are also given. In Section 7, we provide valuable managerial insights for the government and supply chain members. Finally, we summarize the conclusions and give future directions.

Section snippets

Literature review

Two main streams of research are related to our work: (1) supply chain operations under carbon regulations. (2) the impact of low-carbon preference on the supply chain.

Assumptions and notations

As is shown in Fig. 1, under hybrid carbon regulations, a two-echelon supply chain model consisting of one manufacturer (M) and one supplier (S) is established. In the supply chain system, the upstream supplier produces raw materials, which are ordered by the downstream manufacturer. Then, the manufacturer produces products and sells them to consumers according to the market demand. Similar to Savaskan et al. (2004), the manufacturer is in the dominant position, and the supplier is acted as a

Optimal solutions in different carbon trading cases

This section derives the optimal solutions of supply chain members in two different cases, where case 1 denotes the outer carbon trading environment, and case 2 denotes the inner carbon trading environment. Then, we derive the optimal solutions under different cases.

Comparative analysis

Section 4 gives optimal solutions in different carbon trading cases. Then, to explore the impact of inner carbon trading on the supply chain system, a comparative analysis is conducted in this section. When inner carbon trading occurs, what’s notable is how will the optimal decisions and supply chain members’ profits change, and whether the environment can be protected better when compared with the outer carbon trading case. To answer these questions, we first summarize the bounds of market

Sensitivity analysis

Under hybrid carbon regulations, some parameters, like consumers’ low-carbon preferences, unit carbon tax, and unit carbon trading price, have strong connections with members’ optimal decisions. Therefore, it is necessary to use sensitivity analysis to investigate how these important parameters influence decisions and profits in different cases. From Proposition 6, Proposition 7, Proposition 8, we notice that the special case is similar to case 2.1. Hence, we focus on common cases in this

Managerial insights

In the real supply chain operation, both outer carbon trading and inner carbon trading are carbon trading paths that supply chain members can choose. To maximize their own profits and cope with strict carbon regulations, supply chain members need not only to make optimal production, pricing, and CER decisions, but also to choose the appropriate carbon trading path. In this study, we propose a two-echelon supply chain model consisting of one manufacturer with surplus carbon permits and one

Conclusions

Under hybrid carbon regulations, considering consumers’ low-carbon preference and inner carbon trading, this study investigates optimal decisions in a two-echelon supply chain consisting of a leading manufacturer and a supplier. We consider four different carbon trading cases and derive optimal decisions in each case. Then, to analyze the impact of inner carbon trading on decisions, profits, and the environment, a comparative analysis is conducted. Finally, we investigate the impact of

CRediT authorship contribution statement

Chen Zhu: Conceptualization, Software, Writing – original draft, Methodology. Jing Ma: Supervision, Writing – review & editing, Funding acquisition.

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.

Acknowledgment

The research was supported by the National Natural Science Foundation of China (No. 72174086), the National Social Science Fund of China (No. 20ZDA092), and the Fundamental Research Funds for the Central Universities (NW2020001).

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