Production and joint emission reduction decisions based on two-way cost-sharing contract under cap-and-trade regulation

Abstract

Cap-and-trade regulation is widely applied as a carbon policy in low-carbon supply chain management. This study investigates production and carbon emission reduction strategies that are based on such regulation in a two-echelon supply chain, which comprises one manufacturer and one retailer. In this supply chain, the manufacturer directly participates in carbon emission reduction while the retailer is indirectly involved in low-carbon promotion. On this basis, we establish single and joint emission reduction models, in which supply chain members may adopt the one-way or two-way cost-sharing contracts. We then analyze the optimal strategy design for supply chain and the appropriate sharing rate contract. We find that the implementation of contracts can increase carbon emission abatement level, product quantity and supply chain profit. The one-way cost-sharing contract is beneficial for supply chain, whereas the two-way cost-sharing contract is also beneficial for supply chain when the sharing rate is in a small range. Under certain conditions, joint emission reduction model is optimal choice for supply chain. Meanwhile, the sharing rate can affect supply chain choice between decentralized and centralized decisions. Then we propose the extended multiple retailers model and find that this model offers better performance. In addition, carbon emission abatement level increases with carbon trading price by numerical study. The government can stimulate supply chain to reduce carbon emission by regulating carbon trading price, and should also pay attention to the impact on supply chain production and profits.