Carbon allowance approach for capital-constrained supply chain under carbon emission allowance repurchase strategy

Abstract

PurposeThe purpose of this study is to investigate which of the two carbon allowance allocation methods (CAAMs), i.e. grandfathered system carbon allowance allocation (GCAA) and baseline system carbon allowance allocation (BCAA), is more beneficial to capital-constrained supply chains under the carbon emission allowance repurchase strategy (CEARS).Design/methodology/approachAdopting CEARS to ease the capital-constrained supply chains, this study develops two-period game models with manufacturers as leaders and retailers as followers from the perspective of profit and social welfare maximization under two CAAMs (GCAA and BCAA), where the first period produces normal products, and the second period produces low-carbon products.FindingsFirst, higher carbon-saving can better use CEARS and achieve a higher supply chain profit under the two CAAMs. However, the higher the end-of-period carbon price is, the lower the social welfare is. Second, when carbon-saving is small, GCAA achieves both economic and environmental benefits; BCAA reduces carbon emissions at the expense of economic benefit. Third, the supply chain members gain higher profits and social welfare under GCAA, so the government and supply chain members are more inclined to choose GCAA.Originality/valueBy analyzing the profits and total carbon emissions of capital-constrained supply chains under GCAA and BCAA, this study provides theoretical references for retailers and capital-constrained manufacturers. In addition, by comparing the difference in social welfare under GCAA and BCAA, it provides a basis for the government to choose a reasonable CAAM.

Guest editorial: Smart supply chain management to achieve carbon neutrality: risk, challenges and opportunities

“…In order to alleviate short-term funding shortage of low-carbon transformation in traditional manufacturing, the carbon emission allowance procurement strategy (CEARS) has been implemented in parallel with the carbon trading mechanism. In this context, Wang et al (2023a) examine two types of carbon allocation methods (CAAMs), namely grandfathered system carbon allocation (GCAA) and baseline system carbon allocation (BCAA), and determine which is more conducive to capital constrained supply chains under CEARS. This study analyzes the equilibrium under two CAAMs through a game model.…”