Optimal decisions in two-echelon supply chain under hybrid carbon regulations: The perspective of inner carbon trading

Abstract

With the widespread use of carbon tax and cap-and-trade regulation, the coexistence of hybrid carbon regulations is becoming the trend. Under hybrid carbon regulations, considering consumers’ low-carbon preferences and carbon trading within the supply chain, a two-echelon supply chain consisting of one leading manufacturer and one supplier is proposed. Based on different carbon permit constraints, we derive optimal decisions in four different carbon trading cases. Then, we conduct the comparison and sensitivity analysis. The result indicates that (1) Inner carbon trading may not affect manufacturer’s production and carbon emission reduction (CER) decisions, but it always affects the supplier’s wholesale price. (2) Inner carbon trading can benefit the environment only when the manufacturer’s surplus permits are insufficient. In other inner carbon trading cases, the impact on the environment is equal to that in the outer carbon trading case. (3) The increase in consumers’ low-carbon preference can promote the manufacturer’s CER and members’ profits, but it also leads to an increase in total carbon emissions. To control total carbon emissions, the government can increase the carbon tax or outer carbon trading price. (4) For given carbon permits, changes in important parameters may lead to the transformation of inner carbon trading cases, which causes huge fluctuations in members’ profits. Finally, we provide valuable managerial insights for the government and supply chain members.