Revenue or Green Cost Sharing? Optimal coordination under government intervention

Abstract

Petroleum sector is one of the 3 rd largest carbon emissions contributing sector and addressing climate change issues by ignoring this sector is not possible. Organizations are rational in decision making and profit maximization which calls the role of government to intervene and drive the green technology improvement in line to the long-term environmental goals. To this end, the present study aims to find a mechanism for intervention for the development of green technologies within the petroleum sector and minimize the project risk. To find this mechanism, the present study considers a refinery as a manufacturer and a retailer under the government influence. Stackelberg equilibrium is assumed between the manufacturer and retailer in which manufacturer being higher in power acts as a Stackelberg leader and retailer as the Stackelberg follower. Also, Game Theory approach is also considered for modeling purpose and backward induction method was used to find a solution. The decision-making structure of manufacturer and retailer was analyzed under the influence of government intervention and centralized and decentralized SC structures were formulated. It was found that the decentralized SC structure do not coordinate the SC which requires a coordination contract. Revenue Sharing and Green cost sharing contract were analyzed and found that the revenue sharing contract can coordinate the SC more efficiently. Furthermore, it was found that the government can drive the green technology improvement by the implementation of tax and subsidy. However, a higher amount of tax implementation can slow down the development of green technology project and result lowest profit margins hence a risk to address in intervention mechanism. A numerical example is also presented to justify the problem and answer the research questions. In the end, the limitations of the present research and future research direction are depicted.