Abstract
Interactions between government and industry have the characteristics of leader-follower games. To protect the environment, the government uses regulations and economic instruments to indirectly influence operational and investment decisions in industry. The government needs to calibrate its policies while considering industry's self-interested, cost-minimizing reactions. In this paper, a leader-follower model is developed as a bilevel mixed integer linear program for the selection of carbon emissions mitigation measures. It is assumed that the government sets the emissions reduction target, percentage subsidy for mitigation measures, and economic penalty for excess carbon emissions; in response to these policies, industry then chooses mitigation measures to be implemented. The model is demonstrated with a case study on maritime shipping emissions, where a heuristic solution is identified using a fuzzy interactive optimization algorithm. The solution achieves 11.5% reduction in emissions through the implementation of six mitigation measures, of which only one is subsidized. General implications of these results for decarbonization policy are also discussed.
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