Optimizing emission reduction strategies in a two-echelon supply chain: a Stackelberg game perspective under cap-and-trade regulation

Abstract

Abstract Cap-and-trade regulation is a primary market-based mechanism for controlling carbon emissions. In this framework, governments allocate carbon permits to supply chain participants, which can be exchanged either within the supply chain or externally in the broader carbon market. This research employs a Stackelberg game model to examine a two-tier supply chain, including a single supplier and manufacturer. The study explores emission reduction strategies, notably considering the manufacturer’s capital limitations under cap-and-trade. Assuming the leading manufacturer holds surplus carbon permits and the upstream supplier experiences a shortage, we evaluate the dynamics of carbon trading within the supply chain. To facilitate emission reductions and alleviate the manufacturer’s capital constraints, the two parties engage in a cost-sharing contract and supplier financing mechanism. Our findings indicate that an increase in the impact coefficient of the emission reduction rate correlates with a rise in the internal carbon price, resulting in a decrease in the sales price. Under the cost-sharing model, a higher external carbon trading price boosts the carbon emission reduction rate for both parties. The manufacturer realizes optimal profit with the supplier financing model when external carbon prices are low. However, the cost-sharing contract proves more advantageous as prices increase. The preference among these mechanisms depends on the coefficient of the emission reduction rate on the internal carbon price.