Optimal dynamic strategy for emission reduction and operation considering hybrid carbon policy with carbon tax and cap-and-trade

Abstract

Global warming has always been a constant concern for various countries, and carbon emissions are one of the main causes. Accordingly, how to reduce emissions is a problem that enterprises need to pay attention to. The enterprise’s emission reduction activities are closely influenced by government policies. This paper analyzes the effect of a hybrid carbon policy, which means a combination of carbon tax and cap-and-trade policies, on the manufacturer’s carbon abatement activities and supply chain operations in such a condition that the government operates free and paid carbon emission quotas. The study adopts a differential game approach to examine the optimal decision of the supply chain members. We compare the optimal strategies in centralized and decentralized scenarios and put forward a coordinated contract to achieve the Pareto improvement. Our study shows that the carbon tax rate, carbon trade price and the proportion of paid quota all positively affect the emission reduction activities of enterprises over time, but negatively impact the corporate profit and social welfare. However, the set of above policies is advantageous to consumer surplus within a certain range. As for the revenue sharing-transfer payment hybrid contract, when its sharing rate increases within a certain range, the enterprise’s carbon abatement and supply chain members’ profits will improve at the same time. The adjustment of the above policies depends on which aspect the government focuses on.