Supply chain analysis with considerations of free emission permit allocation

With more attention to environmental issues, tradeable carbon emission permits become a new type of firm's business resource. Many firms take emission permits into consideration in the original raw materials-products (services) production process when making operational decisions. Therefore, based on carbon emission permits trading, this paper studies the emission reduction decision for firms along the supply chain and the decision of how to allocate the emission permits among firms from the government's perspective. Game theory is applied to analyze the upstream and downstream firms' emission reduction effects and profits under three different forms of cooperation. The interaction in the supply chain and the total profit of the supply chain are also analyzed. The results show that under three different forms of cooperation, cooperation in both emission reduction and pricing can achieve high efficiency of reduction and high profits. For the government, allocating emission permits by production quantity rather than curbing the total emissions can achieve more obvious emission reduction effect, and the effect is more obvious if the level of cooperation between firms is higher.