Accelerate or hinder it? Manufacturer transformation under competition and carbon emission trading

Abstract

Strengthening carbon regulations and competitive pressures are forcing supply chains to provide environmental (e-) products to replace traditional (t-) products. However, cap-and-trade policy allows manufacturers, the main carbon emission emitters, to trade their emission permits freely. Considering manufacturers' power and key role in producing and carbon trading, we develop a duopoly model consisting of two competing manufacturers. Despite asymmetrical carbon emission reduction efficiencies, the two manufacturers can independently and simultaneously decide their respective t-/e-products outputs, emission reduction levels, and permits trade quotas. The unique Nash equilibrium is derived with the overall cap. We find that the low-cost manufacturer uses its cost advantage to invest more in emission reduction, then sells the excess emission permits to its rival, but makes its rival more competitive in product market. Interestingly, our results show that cap-and-trade policy triggers an industry collusion in which manufacturers reduce competition and improve the power and profits by reducing overall output and adopting differentiated product strategy. Furthermore, the cost advantage and high product substitution can accelerate low-cost manufacturer's transformation but hinder high-cost manufacturers. The impacts of cap-and-trade policy on consumer surplus and social welfare are also discussed to provide guidance for policy makers.

Keywords:

• Cap-and-trade
• manufacturer transformation
• product substitution
• cannibalisation
• competition

Data availability statement

We conducted this research through a stylised model. No data were generated or used during the study.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the National Natural Science Foundation of China (Grant Nos. 71904041, 72071193, and 71921001), Top-Notch Young Talents Program of China (Grant Nos. BB2040150020) and the Fundamental Research Funds for the Central Universities (Grant Nos. KY2040000049 and WK2040000027). The authors thank the editors and the anonymous review team for their valuable comments and suggestions that helped us significantly improve this paper.

Notes on contributors

Chong Huang

Chong Huang is a postgraduate student of School of Management at University of Science and Technology of China. Her main research interests are in the field of sustainable operations management and green supply chain management. Email: [email protected]

Shaofu Du

Shaofu Du is a professor of School of Management at University of Science and Technology of China. His research interest focuses on supply chain management and behavior operation. He has published more than 30 articles in academic journals, including International Journal of Production Research, European Journal of Operational Research, Transportation Research Part E: Logistics and Transportation Review, Annals of Operations Research, International Journal of Production Economics. Email: [email protected]

Bill Wang

Bill Wang is a Senior Lecturer in Business Information Systems Department at Auckland University of Technology, New Zealand. His research interest focuses on operations and supply chain management in sustainability and new technology application. He has published more than 20 peer-review journals, including some in reputable academic journals such as Transportation Research Part E, Decision Support Systems, Supply Chain Management, Computers in Industry, International Journal of Production Research, Journal of Cleaner Production. Email: [email protected]

Wenzhi Tang

Wenzhi Tang is a lecturer of School of Economics and Management at Hefei University. She holds a Ph.D. from University of Science and Technology of China. Her main research interests are in the field of sustainable operations management and green supply chain management. Corresponding author. Email: [email protected]