Energy Performance Contracting in a Supply Chain under Cap-and-Trade Regulation and Carbon Tax Policy

Abstract

Energy performance contracting (EPC) is a new tool for supply chain members to cooperate in emission reduction. This paper investigates a two-tier supply chain composed of a supplier and a capital-constricted manufacturer with carbon reduction demand under different low-carbon policies (Cap-and-Trade Regulation and Carbon Tax Policy, respectively). The manufacturer is motivated to cooperate with the supplier to reduce carbon emissions through EPC services. Different from other research, the emission reduction decision maker of EPC services in this paper could be any supply chain member. The results show that cap-and-trade regulation and carbon tax policy have the same impact on the optimal pricing and emission reduction decisions in the monopoly supply chain, but the manufacturer’s profit is higher under cap-and-trade regulation. And when the cost-sharing coefficient is within a low range, the emission reduction targets decided by the manufacturer are lower. Otherwise, the targets decided by the supplier are lower. Moreover, supply chain members can obtain higher profits when the reduction targets are determined by themselves, and supply chain coordination under different decision models could be realized through revenue sharing contracts. Considering the total profit of the supply chain, when the cost-sharing rate is within a low range, the supply chain can achieve a Pareto improvement if the supplier determines the emission reduction targets. Otherwise, the reduction targets decided by the manufacturer can realize a Pareto improvement.