Abstract: With the rapid modernization and urbanization, environmental issues such as global warming caused by carbon emissions are attracted more attention by the international community. Due to its advantages on flexibility and implementation, cap-and-trade regulations are considered as an effective mechanism for supply chains to reduce carbon emissions.In order to analyze long-term impact of different cap-and-trade policies on low-carbon operations of enterprises in the supply chain, three differential game models between the manufacturer and the retailer in a supply chain are established, which are based on the consideration of influencing effects on market demands and dynamic features of the goodwill. In our model, both cap-and-trade regulations and the goodwill of the product are considered, and the goodwill of the product is affected by carbon emission reduction efforts of the manufacturer and low-carbon promotion efforts of the retailer. Compared with no cap-and-trade regulation, carbon emission reduction level of the product and low-carbon promotion level of the retailer can be improved by the implementation of the cap-and-trade policy based on enterprise’s historical carbon emission data. Furthermore, the goodwill of the product and retailer’s profits canalso be improved from the long-term perspective. Compared with cap-and-trade policy based on enterprise’s historical carbon emission data, carbon emission reduction level,the goodwill of the product and retailer’s profits can be further improved by the implementation of the cap-and-trade policy based on product’s carbon emission data, although low-carbon promotion level of the retaileris the same. Once certain conditions of government’s policies are met, the cap-and-trade policy driven by product’s carbon emission data is more beneficial for the manufacturer. Management insights for carbon emission reduction strategies of supply chain members are provided by our research.

Key words: cap-and-trade policy; differential game; supply chain; carbon emission reduction; low-carbon promotion