A three-player game theory model for carbon cap-and-trade mechanism with stochastic parameters

The cap-and-trade (C&T) mechanism is a widely used tool by governments to reduce the emission of greenhouse gases. Naturally, businesses operating under a C&T scheme adopt strategies to ensure profits maximization and emission minimization. Effectiveness of such strategies depends on mutual interaction of external and internal factors. This article develops a stochastic game theoretical model consisting of a manufacturer, a third-party carbon emission verifier, and the government to study the necessary trade-offs to maximize the stated objectives. The proposed model is validated using a numerical example. Furthermore, it is demonstrated that the proposed model maximizes social welfare by finding the best penalty for bribery and violating the assigned carbon emission quota through advising a re-verification strategy to detect possible collusion between the manufacturer and verifier. • Interactions between players in cap & trade system to minimize the carbon emission. • A three-player game theory model is presented to find the optimal strategies. • An uncertain model is developed by considering some parameters as stochastic. • Show the impact of government regulations on manufacturers’ operational decisions.