Differential game analysis of joint emission reduction decisions under mixed carbon policies and CEA

To understand joint emission reduction (JER) of upstream and downstream firms under a low-carbon operational environment, this study incorporates green technology, remanufacturing, low-carbon promotion, consumer environmental awareness (CEA), and mixed carbon policies (carbon tax + cap-and-trade) into a dynamic framework to investigate JER decisions of the upstream manufacturer and the downstream retailer. Applying the differential game theory, we consider low-carbon goodwill as the state variable and explore members' optimal decisions in four cases, namely, idealized case, noncooperative case, unilateral cost-sharing contract (UCSC) case, and bilateral cost-sharing contract (BCSC) case. Our results show that the noncooperative case leads to a loss of efficiency in joint emission reduction. Although the BCSC is more advantageous than the UCSC in improving the efficiency of JER, a profit redistribution mechanism needs to be included, and the profit distribution ratio should be controlled within a certain interval. Only in this situation do both parties prefer the BCSC. Additionally, the impact of mixed carbon policies and CEA on JER decisions, low-carbon goodwill, profits, and coordination are fully discussed, and it is found that in the face of stricter mixed carbon policies, the downstream retailer plays a moderating role only in cooperative cases. Several practical implications are concluded for JER, contract design, CEA, and carbon policies. Governments and firms can benefit from our research by gaining a deeper understanding of JER.