The Equilibrium Model for the Coexistence of Renewable Portfolio Standards and Emissions Trading: The Supply Chain Analysis

Abstract

China will impose both renewable portfolio standards (RPS) and emissions trading (ET) on the electricity industry, but the product competition in the retail market and the influence of the supply chain network structure has not been investigated. This paper studies policy effects by comparing equilibrium results under different supply chain network structures, and we use the concept of consumer environmental awareness to capture a product’s substitutability. Results indicate that: (1) Both increases in the permit price and the rise of the quota obligation reduces the aggregate profits of the supply chain, but the former rather than the latter increases the profits of the renewable power generating company; (2) the differential pricing improves the retailer’s flexibility in the charged price when confronting increases in the permit price and the quota obligation; (3) higher consumer environmental awareness makes the supply chain less profitable and increases the costs of ET suffered by the consumer; (4) the cooperation between the thermal power generating company and the retailer significantly increases the aggregated profits of the supply chain, although the cooperative profit is sensitive to environmental awareness. Moreover, the consumer suffers the highest costs that the retailer passes on them, and may prefer to feel that the emission cost and compliance cost are less affordable. In contrast, the cooperation between power generating companies removes the influence of environmental awareness, but the aggregated profits of the supply chain are smaller than in the decentralized decision scenario.