As people concern themselves with environmental problems, the right to emit carbon dioxide becomes a new resource with business value that is incorporated in firms' budgets. This paper studies the optimal emission abatement decision for firms in a supply chain, considering emission costs. Four Stackelberg models are established that differ in free emission allowance allocation schemes and emission abatement cost-sharing schemes. On comparing optimal solutions in the models, the results show

more »

... regardless of which free emission allowance allocation scheme or emission abatement cost-sharing scheme is adopted, upstream firms tend to set a higher emission reduction rate. If supply chain firms aim for a higher emission reduction rate, they should advocate that upstream and downstream firms establish emission abatement cost-sharing contracts. The upstream firms should undertake larger emission reduction costs, and use free emission allowance allocation schemes based on emission intensity; the optimal emission reduction rate is related to carbon price, and the relationship may not be monotonous, affected by the difficulty of reducing emissions.