The Impact of Carbon Allowance Allocation Rules on Remanufacturing Decisions in a Closed-Loop Supply Chain

Abstract

Remanufacturing has been widely adopted in the industrial sector due to carbon emission constraints and economic benefits. This paper discusses a closed-loop supply chain composed of an original equipment manufacturer (OEM), an authorized remanufacturer (AR), that is licensed by the OEM to carry out remanufacturing activities in the presence of strategic consumers under carbon cap-and-trade regulations. We establish a Stackelberg game model to identify the optimal manufacturing/remanufacturing decisions made by chain members, and compare the impacts of two different carbon allowance allocation rules on the optimal production decisions and profits, and on the environment. The results showed that optimal decisions in a closed-loop supply chain are affected by the carbon price, carbon allowance allocation, and consumer preferences for remanufactured products. In addition, for high-emission enterprises, the grandfathering rule performs better than the benchmarking rule, yielding higher profits and less environmental impact. The government should take into account the actual economic and production technological developments, implement the benchmarking rule for low-emission enterprises, and apply the grandfathering rule to high-emission enterprises.