The production decisions and cap setting with wholesale price and revenue sharing contracts under cap-and-trade regulation

After consideration of a supply chain consisting of a manufacturer and a retailer, this paper uses a two-stage Stackelberg game to explore the production decision as well as the government cap setting with wholesale price and revenue sharing contracts under cap-and-trade regulation. We also compare the total carbon emission and social welfare with the two contracts. We list some main conclusions. Firstly, we find that the government's over-allocated carbon credits may damage the manufacturer's profit with wholesale price or revenue sharing contract, which can increase the difficulty of implementing cap-and-trade regulation. Secondly, we detect that the optimal cap under the two contracts is decreasing or constant in the environmental concern parameter, which means that the government should keep the optimal cap unchanged under the low or high environmental concern parameter, and decrease the cap when the middle environmental concern parameter increases. Thirdly, we show that using green technology may increase the total carbon emission. Finally, we discover that the social welfare with wholesale price contract is less (larger) than that with revenue sharing contract under low (high) value of the environmental concern parameter, and the social welfare with the two contracts is equal to each other under middle value of the environmental concern parameter.