Does green credit financing mode with cap‐and‐trade scheme really benefit all members?

Abstract There is a never‐ending debate about whether the cap‐and‐trade mechanism is a valid means of achieving carbon reduction. In this study, we examine it from the perspective of supply chain financing, as the cap‐and‐trade scheme appears to be an excellent solution to avoid the carbon emission requirements imposed by green credit financing services. We develop a theoretical framework for comparing three distinct kinds of financing modes: bank credit financing, green credit financing, and green credit financing with a cap‐and‐trade scheme. Based on Stackelberg game with stochastic demand, we then derive optimal outputs for the manufacturer and wholesale prices for the supplier. Counterintuitively, the green credit financing mode is less profitable for manufacturers with low investment in clean production due to stringent carbon emission requirements, yet it is advantageous for the supplier through a higher wholesale price. Conversely, the green credit financing combined with cap‐and‐trade scheme will result in a different situation in which the manufacturer will benefit from the green credit's lower interest rate, but the cap‐and‐trade mechanism will diminish the supplier's power in the Stackelberg game and reduce her profits. Finally, from the perspective of social welfare, the green credit financing mode with cap‐and‐trade scheme will not always benefit for the whole society. Even though it can improve the profit of the manufacturer and consumer surplus, it may lead to higher carbon emission and reduce profits of the supplier when the investment in clean production technology is limited.