Which emission reduction mode is the best under the carbon cap-and-trade mechanism?

Abstract

There are three main emission reduction modes: manufacturer-only emission reduction (M-ER), retailer-only emission reduction (R-ER), and joint emission reduction (J-ER). This paper develops an analytical framework consisting of a manufacturer and a retailer to explore the optimal choice of emission reduction mode under the carbon cap-and-trade mechanism. The paper firstly obtains the optimal decision for each mode using Stackelberg game model and conducts a comparative analysis. Then, the paper examines the effect of the three modes on the environment, consumer surplus, and social welfare. Finally, this work further studies the impact of low-carbon effect and carbon price on the equilibrium results of the three modes. The findings show that the level of emission reduction is the highest in the J-ER mode. Firms prefer the single emission reduction mode if their abatement cost coefficient is small but the J-ER mode if the coefficient is large. Moreover, the highest consumer surplus and social welfare are generated in the J-ER mode and the carbon price can effectively adjust a firm's emission-reduction level. In addition, the stronger the low-carbon effect, the more obvious the difference in emission reduction effect under the three modes. This study contributes to the growing body of research on low-carbon supply chain to provide insights on firms' emission reduction strategies.