Dynamic Carbon Reduction and Marketing Strategies with Consumers’ Environmental Awareness under Cap-and-Trade Regulation

Round 1

Reviewer 1 Report

Please refer attachment.

Comments for author File: Comments.pdf

Author Response

Dear Reviewer:

Thank you so much for your extensive reading and review of this paper. We all feel appreciated for the previous suggestions and comments which are very constructive to the betterment of this research. We have tried our best to revise this paper according to your comments and we hope the revisions is appropriate and satisfactory. The comments and corresponding replays are as follows:

Comment 1: “Intuitive meanings and real life understanding of the proposition as well as the corollary in simple terms for the readers of sustainability”

Reply to comment 1: Thank you so much for this suggestion. We have rewritten the content of Proposition 1 (highlighted in line 311-325) and Corollary 1 (highlighted in line 350-353, 358-363) for easy understanding of the readers. The purpose of Corollaries in decentralized scenario is to explore the impacts of parameters on the carbon emission. To this end, we first study how the parameters affect the optimal decisions as is shown in the Corollary1 and the analysis of Proposition 1 is used to facilitate understanding of Corollary 1 and Corollary 2.

Comment 2: “Intuitive meanings and premise behind the proposition as well as the corollary have to be clearly stated”

Reply to comment 2: Thank you so much for pointing out this problem, we restate the corresponding content for better understanding according to your comment.

In centralized scenarios, we restate the intuition acquired from the Proposition 3 (highlighted in line 416-419). It is discovered from Proposition 3 that the retailer’s marketing decision in centralized scenario is also affected by the carbon trading price, which is different from the result in the decentralized scenario. This because 1) the objective of both supply chain members in centralized scenario is to maximize the overall profit of the system and 2) when the carbon trading price increases, lowering carbon emission is more profitable for the whole supply chain. Hence, from the perspective of overall profit, the retailer should decrease his marketing effort to reduce carbon emission when the price increases.

In the cost-sharing scenario, we explain in detail how the parameters affect the retailer’s cost-sharing strategy (highlighted in L461-475). We mainly concentrate on the impacts of marginal profits of supply chain members and the carbon trading price on the value cost-sharing ratio. It can be found that 1) the increase of trading price will make it harder for the cost-sharing strategy to be performed (when the trading price increases, the retailer’s marginal profitis less likely to be bigger than, which will decrease the probability that the retailer conducts this strategy) and 2) the increase of trading price will decrease the improvement result of the cost-sharing strategy (since the cost-sharing ratio decreases with the increase of trading price).

Comment 3: “Time trajectories of goodwill and carbon emission has to be detailed from an application perspective”

Reply to comment 3: Thank you so much for raising this suggestion! We further analyze the goodwill and carbon emission from application perspective (highlighted in L691-698). The trajectories of goodwill and carbon emission indicate that when the marketing effort is very effective in enhancing the goodwill (is relatively large), the supply chain members should choose the cost-sharing strategy to reduce the carbon emission and full cooperation cannot reduce the carbon emission. When the marketing effort is less effective in enhancing the goodwill (is relatively small), full cooperation is the most effective method to reduce the carbon emission. Hence, in practical operation, the value of marginal effectiveness of marketing effort on goodwill will exert influence on how the supply chain is operated.

Comment 4: “The entire cap-and-trade market is voluntary in nature; therefore, some kind of detailed policy advise would be good”

Reply to comment 4: Thank you so much for this suggestion! In this paper, we analyze the influences of cap-and-trade regulation and add policy advice (highlighted in L758-765). The cap-and-trade regulation is proved effective in curbing carbon emission. Hence, from the perspective of government, if the government aims to lower the carbon emission of the supply chain system, raising the carbon trading price is a useful method. Meanwhile, enhancing the consumers’ environmental awareness is also an effective method. For example, the government can emphasize the importance of environmental protection through mass media or display the disastrous consequences of jeopardizing environment to enhance the awareness.

Comment 5: “Dynamic carbon reduction and marketing decisions of 734 supply chain members with consideration of consumers’ environmental awareness” (L734-735); this paper studies this situation much like a theoretical/mathematical experiment, which is rather obvious to be quite accurate. However, they’ve to include a section to skillfully critique their theoretical findings as well.”

Reply to comment 5: Thank you so much for this advice! We add an extra paragraph  (highlighted in L778-785) in the conclusion section and based on the suggestions of reviews, in which we point out our future study direction about the study of consumers’ environmental awareness and cap-and-trade regulation.

Comment 6: “The manufacturer should 741 enhance the carbon reduction effort and the retailer should reduce the marketing effort in 742 all scenarios” perfect theoretically, however, why will it be done practically? (L741- 742)”

Reply to comment 6: Thank you so much for raising this question! This finding reveals the impacts of consumers’ environmental awareness on the carbon reduction and marketing decisions. Due to the presence of this awareness, the carbon emission will exert negative effect on the market demand and the increase of this awareness indicates larger impact of carbon emission on demand. Hence, when this awareness increases, the manufacturer should enhance the carbon reduction effort, which is consistent to previous researches and the retailer should reduce the marketing effort to jointly reduce the carbon emission. From the practical perspective, the increase of this awareness indicates that the consumers are more concerned about environment protection and are more preferable to products with less carbon emission. However, marketing activities with high intensities are usually associated with waste of resource, generating pollutant or stimulating production and carbon emission, which may give bad impression to the consumers and practically hinder the consumers from buying the products even if the firm plans the otherwise. Hence, when the consumers are environment sensitive, lowering the intensity of the marketing is more advisable. We elaborate on this point in L743-752.

Comment 7: “Revenue sharing 759 ratio is within a certain range”, why? Please define (L759)”

Reply to comment 7: Thank you so much for this raising this question! The revenue-sharing ratio is part of the “two-subsidy and revenue-sharing” mechanism. Under this mechanism, the total profit of the supply chain is identical to that in the centralized scenario. Hence, the key of this mechanism to be accepted by both members is that both of them can acquire profits bigger than those they can acquire in the decentralized scenario, which is realized by sharing the revenue. When the revenue-sharing ratio increases, the manufacturer’s profit will decrease indicating that the ratio has an upper limit to make sure that the manufacturer can acquire more profit than that in the decentralized scenario. But when the revenue-sharing ratio decreases, the retailer’s profit will decrease, indicating that the ratio has a lower limit to make sure that the retailer can acquire more profit than that in the decentralized scenario. When the overall profit can reach the centralized level and both members can acquire more profits (which is guaranteed by the revenue-sharing ratio), then the supply chain can be perfectly coordinated. Hence, the revenue-sharing ratio should be within a certain range.

Finally, thank you so much again for your extensive review of this paper. We also feel appreciated for your constructive advice, which is of great importance to the betterment of this paper. We hope that our revisions and replies are appropriate and satisfactory! Thank you very much!

Author Response File: Author Response.pdf

Reviewer 2 Report

The authors have been relatively unlucky in the referees' lottery, as I am not an expert in this particular subfield, and I can hardly judge the actual contribution of this work to the existing scholarship. Therefore, I will suspend my judgement on the first two sections of the paper. The only suggestion I dare to propose is that the authors spend a little more effort presenting some of the main terminologies. On page 2, the authors write, " ... the manufacturing firms are forced to change their production process to produce green products [9]". What do they mean by green products? Do they mean products produced by means of green technology or products that will be less pollutant than other alternatives available on the market? Is a pollutant fuel-powered car made with non-pollutant technology a green product?

Also, I suggest the authors run an additional proofreading and typo detection round. Several omitted words and typos make the reading harder than it should be. I am not an English native speaker, so I do not want to stress this comment too much, but the results must be delivered clearly. 

Section 3 and 4

As for the main contribution of the paper, I have some comments that I believe are important to address. 

1) Assumption 3 is crucial, as it has to do with consumer preferences. The authors assume consumers generate demand by maximizing the following utility function: 
U = [v + \theta G(t) - \beta E(t)] q - q²/2

As an IO scholar, I cannot help but notice the authors entirely omit prices. Given the results derived by the authors, I must admit I am not particularly happy with this choice. In assumption 5, the authors introduce \rho_R and \rho_M as parameters (n.b., they are absent in table 1) that measure the profit margins of the retailer and the manufacturer, respectively. Intuitively, those margins depend on prices, that in turn rely on the interaction between consumers' demand elements (goodwill and awareness) and the choice variables of the firms. By fixing the profit margins exogenously, the authors introduce a distortion that the model does not justify.

2) Proposition 1, Corollary 1. A striking result the authors provide the reader with is that the level of emission cap set by the government doesn't affect the firms' decisions, not in the decentralized scenario nor otherwise. I believe this has to do with i) the lack of a pricing system associated with the emission permit and ii) the lack of any analysis on constraints.

i) As for the first point, it is intuitive that if the government sets a stringent regulation with a low cap C*,  firms may raise their willingness to pay for an additional unit of emission permits. As a consequence, p0 would rise in equilibrium. Instead, with a very lax regulation that implies a high C*, firms would demand relatively fewer permit units in the secondary market, and the price p0 would decrease. 

 ii) Instead, point two addresses that if C* (the emission quota) is exceptionally high, p0(C* -E) is positive as the firms can sell permit units in the secondary market. However, for this transaction to be optimal, it must be that p0 is higher than the marginal revenue a firm would get by using that permit unit to produce and sell an additional unit of the final good. If prices are such that it is more convenient to use all the permits up to C* (i.e., if the price of the final good is sufficiently larger than p0), no trade will emerge.

I believe that the authors should engage in a more thorough analysis of this result. On page 9, after corollary 2, the authors write: "... However, the emission quota has no impact on the carbon emission, for the fact that the optimal decisions of supply chain members will not be affected by the value of quota." Such a sentence is, at most, tautological. I would appreciate a more detailed analysis of the result that C* does not affect firms' strategy. If that is the case, why should a government even bother to set a quota and not simply put C*=0?

3) Timing, I am not sure this is a significant problem, but the three scenarios (decentralized, centralized, and cost-sharing) seem not perfectly comparable. In particular, the cost-sharing scenario introduces at least two variations to the other cases - i.e., the possibility for the retailer to contribute to part of the pollution-abatement costs and the sequential structure of the game (Stackelberg-Nash). Hence, the analysis is no longer ceteris paribus, and I am concerned that comparing the results may be problematic or less informative than intended because of this problem. 

4) Again, on the demand function. The demand function, taken as it is, introduces a relationship between consumers' goodwill and environmental awareness. The stronger the former, the larger the demand. Viceversa, environmental awareness decreases demand proportionally to the emission level. This one is a minor comment, but I would have expected a more complex relationship involving interactions between consumers' goodwill and the emission level. 

Author Response

Dear reviewer:

Thanks so much for your comments and suggestions for the manuscript entitled “Dynamic Carbon Reduction and Marketing Strategies with Consumers’ Environmental Awareness under Cap-and-Trade Regulation” (sustainability-1283640). These comments can not only help us to improve this paper, but will also enlighten us of the future research direction. Hence, these comments are very valuable and constructive. We have studied these comments carefully and made replies to the comments in the following section. We hope our replies are satisfactory and is capable of answering your question.

Comment 1: “I suggest the authors run an additional proofreading and typo detection round”

Reply to comment 1: Thank you so much for pointing out this issue, we have thoroughly checked this paper and make revisions about the errors in grammar and spelling. Sorry for any trouble caused by these errors during the reading of this paper.

Comment 2: “In assumption 5, the authors introduceandas parameters (they are absent in table 1) that measure the profit margins of the retailer and the manufacturer, respectively. Intuitively, those margins depend on prices, that in turn rely on the interaction between consumers' demand elements (goodwill and awareness) and the choice variables of the firms.”

Reply to comment 2: Thanks so much for raising questions about the marginal profits and demand! Actually, the assumption of marginal profit is consistent to previous literature about the study of dynamic supply chain, such as

1. Zhang, J.; Gou, Q.; Liang, L.; Huang, Z. Supply chain coordination through cooperative advertising with reference price effect. Omega 2013, 41, 345–353.
2. Liu, L.; L, F.T. Differential Game Modelling of Joint Carbon Reduction Strategy and Contract Coordination Based on Low-Carbon Reference of Consumers. Clean. Prod. 2020, 277, 123798.
3. Jørgensen, S.; Sigué, S.P.; Zaccour, G. Dynamic cooperative advertising in a channel. J. Retail. 2000, 76, 71–92.
4. Lu, L.; Zhang, J.; Tang, W. Coordinating a supply chain with negative effect of retailer’s local promotion on goodwill and reference price. RAIRO-Oper. Res. 2017, 51, 227–252
5. Yang, J.; Xie, J.X.; Deng, X.X.; Xiong, H.C. Cooperative advertising in a distribution channel with fairness concerns. Eur. J. Oper. Res. 2013, 227, 401–407.
6. Liu, H.; Liu, S. Considering in-app advertising mode, platform-app channel coordination by a sustainable cooperative advertising mechanism. Sustainability 2020, 12, 145.

The underlying rationality behind this assumption is that in the fully competitive market, the marginal profit of a firm in certain industry is constant. However, pricing problem is a very important topic and thank you very much for enlightening us about the future direction of the study. It is exciting to envision the paper studying the dynamic pricing problem with the presence of cap-and-trade regulation and consumers’ environmental awareness on the basis of this paper. Thanks again for putting forward this point!

Comment 3: “I would appreciate a more detailed analysis of the result thatdoes not affect firms' strategy.”

Reply to comment 3: Thank you so much for raising question about the cap-and-trade policy. According to the literatures concerning the study of cap-and-trade policy, the cap-and-trade policy includes two major forms, which are grandfathering and benchmarking, respectively. The grandfathering rule uses historical carbon emission to determine the current carbon quotas, indicating that the current carbon quota is not related to the quantity of the products but a fixed value allocated by the government. The benchmarking sets the carbon unit quota for per carbon emission, indicating that the total carbon quota is related to the quantity of the products.

The following literatures concern the study of the grandfathering rule:

7. Dong, C.W.; Shen, B.; Chow, P.S.; Yang, L.; Ng, C.T. Sustainability investment under cap-and-trade regulation. Ann. Oper. Res. 2016, 240, 509–531
8. Qian, X.H.; Chan, F.T.S.; Zhang, J.H.; Yin, M.Q.; Zhang, Q.Y. Channel coordination of a two-echelon sustainable supply chain with a fair-minded retailer under cap-and-trade regulation. Clean. Prod. 2020, 244, 118715.
9. Kuiti, M.R.; Ghosh, D.; Basu, P.; Bisi, A. Do cap-and-trade policies drive environmental and social goals in supply chains: Strategic decisions, collaboration, and contract choices. J. Prod. Econ. 2020, 223, 107537.
10. Xu, J.; Chen, Y.; Bai, Q. A two-echelon sustainable supply chain coordination under cap-and-trade regulation. Clean. Prod. 2016, 135, 42–56.
11. Xu, X.; He, P.; Xu, H. Supply chain coordination with green technology under cap-and-trade regulation. J. Prod. Econ. 2016, 183, 433–442.
12. Xu, L.; Wang, C.; Zhao, J. Decision and coordination in the dual-channel supply chain considering cap-and-trade regulation. J. Clean. Prod. 2018, 197, 551–561.
13. Li, Z.; Pan, Y.; Yang, W.; Ma, J.; Zhou, M. Effects of government subsidies on green technology investment and green marketing coordination of supply chain under the cap-and-trade mechanism. Energy Econ. 2021, 101, 105426.
14. Xia, L.; Guo, T.; Qin, J.; Yue, X.; Zhu, N. Carbon emission reduction and pricing policies of a supply chain considering reciprocal preferences in cap-and-trade system. Oper. Res. 2017, 1–27.
15. Ji, J.; Zhang, Z.; Yang, L. Carbon emission reduction decisions in the retail-/dual-channel supply chain with consumers’ preference. Clean. Prod. 2017, 141, 852–867

The following literatures concern the study of the benchmarking rule:

16. Yang, L.; Ji, J.; Wang, M. The manufacturer’s joint decisions of channel selections and carbon emission reductions under the cap-and-trade regulation. Clean. Prod. 2018, 193, 506–523.
17. Zetterberg, L. Benchmarking in the European Union Emissions Trading System: Abatement incentives. Energy Econ. 2014, 43, 218–224.

The following literatures compare the two rules:

18. Chang, X.Y.; Li, Y.P.; Zhao, Y.B.; Liu, W.J.; Wu, J. Effects of carbon permits allocation methods on remanufactured production decisions. Clean. Prod. 2017, 152, 281–294.
19. Ji, J.; Zhang, Z.; Yang, L. Comparisons of initial carbon allowance allocation rules in an O2O retail supply chain with the cap-and-trade regulation. J. Prod. Econ. 2017, 187, 68–84.
20. Wei, C.; Zhang, L.F.; Du, H.Y. Impact of cap-and-trade mechanisms on investments in renewable energy and marketing effort.  Prod. Consump. 2021, 28, 1333-1342.
21. Chen, W.; Chen, J.; Ma, Y. Renewable energy investment and carbon emissions under cap-and-trade mechanisms. Clean. Prod. 2021, 278, 123341.
22. Zhang, Y.J.; Wang, A.D.; Tan, W. The Impact of China’s Carbon Allowance Allocation Rules on the Product Prices and Emission Reduction Behaviors of ETS-Covered Enterprises. Energy Policy 2015, 86, 176–185.

We set the carbon emission cap according to the grandfathering rule and assume that the cap in this paper is constant. This assumption is consistent with the assumptions in previous literatures concerning the study of grandfathering rule in cap-and-trade regulation. Meanwhile, similar conclusion such like the value of carbon emission cap exerts no influence on the decisions of supply chain members can be found in these literatures. This because, when the cap is decided according to the grandfathering rule, it cannot affect the marginal revenue. And even though the supply chain members can acquire more revenue form the trading market by enhancing the carbon reduction effort, the total profit may not become higher due to the increasing marginal cost effect of the carbon reduction effort. But if the carbon emission cap is decided according to the benchmarking rule, then the value of cap will influence the optimal decisions of supply chain members, as is shown in the literatures concerning the study of benchmarking rule. We hope this explanation is satisfactory and is able to answer your question.

Comment 4: “Timing, I am not sure this is a significant problem, but the three scenarios (decentralized, centralized, and cost-sharing) seem not perfectly comparable. In particular, the cost-sharing scenario introduces at least two variations to the other cases - i.e., the possibility for the retailer to contribute to part of the pollution-abatement costs and the sequential structure of the game (Stackelberg-Nash). Hence, the analysis is no longer ceteris paribus, and I am concerned that comparing the results may be problematic or less informative than intended because of this problem.”

Reply to comment 4: Thank you so much for raising this problem! One of the major aim of this paper is to analyze the coordination strategy of dynamic supply chain under the cap-and-trade regulation. Hence, we first analyze the optimal decisions and profits under centralized, decentralized and cost-sharing scenarios, respectively, and based on the results in these three scenarios, we further use the two-subsidy and revenue sharing mechanism to coordinate the supply chain. This the overall frame of this paper, which is often adopted by previous study, such as

23. Xu, J.; Chen, Y.; Bai, Q. A two-echelon sustainable supply chain coordination under cap-and-trade regulation. Clean. Prod. 2016, 135, 42–56.
24. Zhou, Y.; Ye, X. Differential game model of joint emission reduction strategies and contract design in a dual-channel supply chain.  Clean. Prod. 2018,190, 592-607.
25. Xia, X.Q.; Ruan, J.H.; Juan, Z.R.; Shi, Y.; Wang, X.; Chan, F.T.S. Upstream-downstream joint carbon reduction strategies based on low-carbon promotion. J. Environ. Res. Public Health. 2018, 15, 1351.
26. Kuiti, M.R.; Ghosh, D.; Basu, P.; Bisi, A. Do cap-and-trade policies drive environmental and social goals in supply chains: Strategic decisions, collaboration, and contract choices. J. Prod. Econ. 2020, 223, 107537.
27. Liu, L.; L, F.T. Differential Game Modelling of Joint Carbon Reduction Strategy and Contract Coordination Based on Low-Carbon Reference of Consumers. Clean. Prod. 2020, 277, 123798.
28. Xia, J.; Niu, W.J. Carbon-reducing contract design for a supply chain with environmental responsibility under asymmetric information. Omega 2021, 102, 102390.
29. Wang, M.; Li, Y.; Li, M.; Shi, W.; Quan, S. Will carbon tax affect the strategy and performance of low-carbon technology sharing between enterprises? Clean. Prod. 2019, 210, 724–737.
30. Xia, X.Q.; Ruan, J.H.; Juan, Z.R.; Shi, Y.; Wang, X.; Chan, F.T.S. Upstream-downstream joint carbon reduction strategies based on low-carbon promotion. J. Environ. Res. Public Health. 2018, 15, 1351.
31. Wei, J.Y.; Wang, C.X. Improving interaction mechanism of carbon reduction technology innovation between supply chain enterprises and government by means of differential game. Clean. Prod. 2021, 296, 126578.
32. Dong, C.W.; Shen, B.; Chow, P.S.; Yang, L.; Ng, C.T. Sustainability investment under cap-and-trade regulation. Ann. Oper. Res. 2016, 240, 509–531

Thanks again for asking this question and we hope that it is a satisfactory answer to your question.

Comment 5: “Again, on the demand function. The demand function, taken as it is, introduces a relationship between consumers' goodwill and environmental awareness. The stronger the former, the larger the demand. Vice-versa, environmental awareness decreases demand proportionally to the emission level. This one is a minor comment, but I would have expected a more complex relationship involving interactions between consumers' goodwill and the emission level.”

Reply to comment 5: Thanks so much for your suggestion! We will rethink this issue alongside your suggestion and try to discover deeper relationship between consumers’ environmental awareness, goodwill and carbon emission. Thanks again for your inspiring suggestion!

Finally, thank you so much again for your inspiring and constructive advice. You really enlighten us a lot about our study and future direction! We all feel appreciated for your effort and brilliant idea!

Author Response File: Author Response.pdf

Round 2

Reviewer 2 Report

I am satisfied with the authors' reply to my previous concerns.