Integrated impact of the carbon quota constraints on enterprises within supply chain: Direct cost and indirect cost

Abstract

Emission Trading Scheme (ETS) has become one of the most popular ways to meet CO2 reduction targets owing to its flexibility and cost effectiveness. This paper applies game theory to analyze the impacts of direct and indirect costs derived from ETS on enterprise's competitiveness and supply partnership. By emphasizing the role of carbon intensity, the results illustrate that an enterprise with lower carbon intensity will have stronger capability to ease the pressures of both direct and indirect costs. From the perspective of direct cost, when reducing carbon intensity to a certain extent, the enterprise will take the advantage of carbon competitiveness to further expand the market share. The enterprise with low carbon intensity can even increase its product output amount instead of damaging it. From the perspective of indirect cost, a downstream manufacturer with lower carbon intensity is more likely to obtain the favor of suppliers. If choosing a downstream partner with high carbon intensity, the supplier may need to reduce the price of its product to ensure the product's demand and profits. Therefore, the implementation of ETS will drive suppliers to choose low-carbon partners, resulting in low-carbon supply partnerships replacing the original one. Based on a numerical example combing with the investigation in Hubei ETS pilot, this research argues for the enlightenment, and implications, of carbon quota constraints as a part of China's emission reduction policies.