Comparisons of initial carbon allowance allocation rules in an O2O retail supply chain with the cap-and-trade regulation

Abstract

This paper focuses on an O2O retail supply chain in the context of low-carbon environment. The decision models are constructed under three cases: without cap-and-trade regulation, cap-and-trade regulation based on grandfathering mechanism, and cap-and-trade regulation based on benchmarking mechanism. The emission reduction strategies of the supply chain members in the three cases are then discussed. The paper compares the effects of the grandfathering and benchmarking mechanisms on the firm's decisions, profits and social welfare. Firstly, the results show that the unit carbon quota plays a decisive role in firm's decisions. Compared with the grandfathering methodology, the benchmarking one can more effectively push manufacturers to produce low-carbon products and motivate retailers to promote low-carbon products. Secondly, it is profitable for the retailer to cooperate with a manufacturer who has lower emission reduction cost. Simultaneously, the retailer will prefer the benchmarking mechanism to the grandfathering mechanism. Thirdly, for the government, it is beneficial to use grandfathering mechanism for low-carbon-emission firms and use benchmarking mechanism for high-carbon-emission firms. Also, the paper provides government and firms with conditions where the benchmarking allocation method is more suitable for sustainable development. The government's decision on benchmarks is a critical factor in maximizing the social welfare.