Retailer-driven incentive contracts for carbon emission reduction with carbon tax and yield uncertainty

Abstract

Since the tax of carbon emission is popular and consumers are exhibiting low-carbon preference, a manufacturer may invest to adopt carbon emission reduction (CER) technologies to produce green products. In face of high cost of CER investment and random yield in low carbon production processes for the manufacturer, this paper explores the incentive role of the contracts of revenue-sharing (RS) and cost-sharing with subsidy (CSS) offered by a retailer in a low-carbon supply chain. Theoretical analysis and numerical experiments show that both RS and CSS can promote the manufacturer’s Carbon Emission Reduction (CER) efforts and improve the efficiency of the supply chain, and RS boosts these more than CSS. RS and CSS can also decrease firms’ profit losses due to yield uncertainty, and RS also decreases firms’ profit losses more than CSS. Moreover, to motivate manufacturer’s CER efforts, the government should levy the highest-possible carbon tax under RS, the medium-level carbon tax under CSS, and the lowest-possible carbon tax for the decentralized case, and levy the same carbon tax on the centralized case with that under RS.