To Pool or Not to Pool in Carbon Quotas: Analyses of Emission Regulation and Operations in Supply Chain Supernetwork under Cap-and-Trade Policy

Carbon emission control and maintaining economic growth drive firms and governments to strike a balance between these two aspects via environmental policies. Inspired by diverse carbon permit trading practices, we study the impact of two variant cap-and-trade schemes on supply chain performance and emission reduction. Focusing on a realistic supply chain supernetwork, we examine the operational decisions and emission mitigations of the system under the carbon caps-pooling and caps-nonpooling schemes which reflect two typical modes of carbon quota in practice. We exploit game theoretical models to characterize the strategic interactions of supernetwork node firms, and then transform them into equivalent variational inequality problems to derive the associated equilibria in different scenarios. We find that the carbon caps-pooling scheme yields a win–win outcome in terms of the environmental and economic performance and the carbon permit sale price affects the decreasing rate of carbon intensity more effectively than the purchasing price. Moreover, the caps-pooling scheme further restrains firms’ opportunistic behaviors of lowering production and selling surplus carbon permits at a high price. Notably, comparing the two carbon schemes implies that under the cap-and-trade policy governments should stimulate firms adopt the caps-pooling scheme with emission permits trading, and accordingly firms have more flexible control over carbon permits. We further conduct computational analysis to validate and illustrate the results, which indicates the robust effect of caps-pooling scheme on the supply chain supernetwork under distinct market structures.