Stick Alone or Carrot in Support? Buyer's Carbon Compliance Management Strategy Under Carbon Auditing

Abstract

As carbon neutrality gains momentum, buyers in supply chains are setting net-zero emissions targets for their suppliers to drive low-carbon transformation. How buyers effectively address supplier carbon abatement fraud and non-compliance through carbon auditing needs to be urgently solved. This study develops game models to analyze the impact of four carbon compliance management strategies, i.e., carbon credit compensation (CC), zero-tolerance (ZT), reward-based carbon credit compensation (RCC) and reward-based zero-tolerance (RZT) strategies, on the supplier’ carbon compliance level and buyer’ auditing level. Key findings reveal that (1) Compared with flexible strategies (CC and RCC), when the carbon credit price is low, mandatory strategies (ZT and RZT) enable the buyer to reduce the auditing level and the supplier to enhance the carbon compliance level if consumers have high low-carbon preferences. (2) Reward-and-punishment strategies (i.e., RCC and RZT) always incentivize the supplier to enhance its carbon compliance level, but do not necessarily help the buyer to decreases the carbon auditing level, depending on the supplier's initial carbon emission. (3) Form the perspective of buyer profit, the ZT strategy is optimal when the supplier's carbon compliance capability is high and the carbon credit price is low, and the RZT is optimal when the supplier's carbon compliance capability is moderate and the carbon credit price is low, otherwise, the CC strategy is the buyer's optimal choice. (4) The buyer adopting the RZT strategy may create a win-win outcome for environmental and economic performance if consumers have high low-carbon preferences.

Keywords: Supply Chain Management, Net-Zero Emissions, Carbon Compliance Management, Carbon Auditing, Reward and Punishment