Optimal Channel Structure for Remanufacturing under Cap-and-Trade Regulation

Abstract

In recent years, carbon cap-and-trade has been promoted by many national governments aiming to limit, or cap, total carbon dioxide emissions. Such a mechanism impacts manufacturers’ remanufacturing decisions, as it increases the cost of carbon emissions. The current literature has recognized the importance of carbon cap-and-trade regulations; however, little attention has been paid to what effect such regulations have on manufacturer’s remanufacturing with the flexibility to engage it in-house or outsource it to third-party remanufacturers. To fill this gap, we develop two theoretical models that, under the carbon cap-and-trade mechanism, allow the manufacturer to engage in remanufacturing operations in-house (Model H) or outsource them to an independent remanufacturer (Model R). The primary goal of this paper is to understand what effects carbon cap-and-trade regulations have on green supply chain management when producing new and remanufactured products. In particular, we find that although the manufacturer has a higher incentive to reduce the carbon emissions per remanufactured unit in Model H, the total carbon emissions may be higher than the value in Model R, because the sales volume effect dominates in that case. As such, our analysis suggests that environmental groups and agencies should not only take effective measures to stimulate the incentive of reducing the carbon emissions per unit but must also take care regarding the supply chain structure to limit the volume effect.