Cooperation of firms’ environmental innovation in a supply chain under government regulation

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As climate pollution becomes more severe, there is a growing interest in reducing emissions across all industries. Motivated by the emerging popularity of inter-firm cooperation to reduce carbon emissions in the supply chain, this paper investigates the effect of the firms’ environmental innovation cooperation under government regulation. Specifically, we consider a supply chain with a manufacturer selling products through a retailer, where both firms have asymmetrical environmental innovation efficiencies. Based on whether to cooperate in environmental innovation, the manufacturer and retailer invest in environmental innovation separately or simultaneously. The findings suggest that corporate collaboration, especially environmental innovation cartels, can promote environmental innovation, reducing product emission intensity, further driving down wholesale price, and increasing sales volume. Notably, the more closely firms cooperate, the more beneficial it is for the entire supply chain and consumers, but not necessarily for the manufacturer and retailer simultaneously. In the case of environmental innovation cartels, a two-part tariff contract can coordinate the supply chain, increasing the manufacturer’s and retailer’s profits. Furthermore, cooperation is detrimental to the environment when the carbon tax rate is relatively high. The government should set the intensity of regulation reasonably, considering the environmental innovation mode of firms. As the emission quota grows, carbon tax regulation is more likely to result in fewer emissions and is favored by policymakers. We also extend the model to multiple situations to check the robustness of the results and find our main results remain valid.