Dynamic decision-making for carbon emission reduction in the electricity supply chain under different allowance allocation schemes

Various carbon emission allowance (CEA) allocation schemes have significant disparities in their effects on emission reduction. It is urgent to address the impacts of CEAs on the long-term emission reduction strategies for the electricity supply chain in the carbon market. This study constructs a differential game model for analyzing emission reduction under free CEA allocation schemes of grandfathering and benchmarking. It aims to explore the decision-making of emission reduction efforts level for the generator and green service efforts level for the retail electricity provider, validating the model with operational market data. The findings show that: (1) benchmarking is more effective than grandfathering in enhancing the generator's level of emission reduction efforts and long-term level of electricity carbon emission reduction in the electricity supply chain than grandfathering; (2) the impacts of grandfathering and benchmarking on the green service efforts level for the retail electricity provider depend on the decision-making methods, with the same level under both allocation schemes in decentralized decision-making and the higher level under benchmarking in centralized decision-making; (3) the retail electricity provider results in more significant long-term profit under benchmarking. Moreover, when the condition is met, there is also greater long-term profit for the generator and overall profit for the electricity supply chain under benchmarking. The study offers theoretical evidence for carbon emission reduction in the electricity supply chain and provides decision support for the government in formulating CEA allocation schemes.