Carbon emission reduction decisions of supply chain members under cap-and-trade regulations: A differential game analysis

A global consensus has been reached that carbon emission reduction is now an inevitable social trend. A manufacturer can reduce its direct carbon emission by itself and indirect carbon emission by cooperating with suppliers. In a low-carbon context, we investigate a detailed model that combines cap-and-trade regulations with the low-carbon preferences of consumers. In this research, differential game models are developed to study the emission reduction decisions of two supply chain members under three scenarios: (1) a non-cooperation (coop) scenario where the manufacturer makes a decision on its level of effort in carbon emission reduction and the supplier is followed; (2) a coop program scenario in which the supplier’s emission reduction efforts are supported by the manufacturer; and (3) a two-way coop contract scenario in which both supply chain members support each other’s emission reduction efforts. A comparative study is conducted on supply chain members’ carbon emission reduction efforts and optimal profits obtained under the above scenarios. The results indicate that under the two-way coop contract scenario, both supply chain profits and emission reduction levels are the largest, with the greatest efforts made by channel members. In contrast to the non-coop scenario, both firms make more emission reduction efforts and earn more profits under the coop program scenario.