Carbon taxes vs. cap-and-trade: Do policy choices influence enterprise emissions dynamics and strategic responses?

Abstract

Putting a price on carbon is widely recognized as a cost-effective strategy for reducing emissions, yet it imposes additional costs that manufacturers must manage to maintain production efficiency, particularly in high-emission sectors. This study develops a Stackelberg differential game model to examine manufacturer–retailer interactions under carbon taxes (CTs), cap-and-trade (CAT), and a hybrid mechanism. By capturing dynamic accumulation of emission reductions, the model derives equilibrium strategies concerning abatement efforts, wholesale prices, and order quantities. Numerical simulations then identify the conditions for Pareto improvements in profits and assess how key parameters affect equilibria and supply chain performance, thereby reinforcing subsequent arguments. First, higher CTs rate prompts the manufacturer to increase abatement efforts and wholesale prices while suppressing retailer orders and profits, which undermines long-term policy effectiveness. Second, elevated unit carbon prices within the CAT system strengthen emission reduction incentives and profitability for both supply chain members, though these effects are somewhat weaker under the hybrid scenario. Lastly, hybrid policy achieves superior environmental performance, while phased effects observed in the CTs scenario reflect varying degrees of economic adaptability among supply chain members. Findings may shed light on designing phased carbon pricing strategies that balance economic stability with long-term emission reductions goals.