Cap allocation rules for an online platform supply chain under cap‐and‐trade regulation

Abstract

AbstractCap‐and‐trade regulation is increasingly adopted by countries and governments to curb carbon emissions. This regulation can be implemented based on two rules, that is, the traditional cap allocation rule and the linear cap allocation rule. Considering the impact of online channel structure on the manufacturer's production and low‐carbon investment strategy, this paper aims to explore the economic and environmental performances of the two rules. The results show that the linear rule encourages the government to allocate less cap to each unit product as the emission abatement level increases, preventing the manufacturer from gaining a windfall profit from the free carbon credits. Besides, the government could use the traditional cap allocation rule to better control the total carbon emissions but use the linear cap allocation rule to obtain more social welfare as well as economic benefit. No matter which cap allocation rule is implemented, the manufacturer always performs better in reseller mode, and the e‐tailer might perform better in reseller (marketplace) mode given a high (low) low‐carbon investment efficiency. This study enriches the literature on the interplay between the cap allocation rule and selling mode and provides insights into decision‐making for governments and firms.