Joint pricing and product carbon footprint decisions and coordination of supply chain with cap-and-trade regulation

Abstract

The implementation of cap-and-trade regulation worldwide is bound to have some effects on supply chain decision-making. This paper investigates optimal pricing and product carbon footprint decisions of the supply chain consisting of a manufacturer and a retailer under cap-and-trade regulation by applying optimization and game theory. By comparing the optimal results between the centralized and decentralized decision-making models, we find that the optimal product carbon footprint and selling price not only depend on the carbon trading price and carbon cap allocated by the government, but also relate to the initial carbon footprint of the product and the decision-making methods in the supply chain. It is found that there is also a “double marginalization” in the decentralized situation, thus we coordinate the supply chain using a two-part tariff contract. Specifically, only the manufacturer adjusts dynamically the wholesale price and fixed fee within the coordinating contract according to different initial carbon footprint and the range of the carbon cap reduction by the government. Finally, we obtain several interesting conclusions from the numerical examples and provide managerial insights and policy implications from the analytical results.