Two-Way Carbon Options Game Model of Construction Supply Chain with Cap-And-Trade

Wen Jiang (), Zhaoyi Tong, Yifan Yuan, Qingqing Yang, Jiangyan Wu and Ruixiang Li
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Wen Jiang: College of Architecture and Urban-Rural Planning, Sichuan Agricultural University, Chengdu 611830, China
Zhaoyi Tong: College of Architecture and Urban-Rural Planning, Sichuan Agricultural University, Chengdu 611830, China
Yifan Yuan: College of Architecture and Urban-Rural Planning, Sichuan Agricultural University, Chengdu 611830, China
Qingqing Yang: College of Architecture and Urban-Rural Planning, Sichuan Agricultural University, Chengdu 611830, China
Jiangyan Wu: College of Architecture and Urban-Rural Planning, Sichuan Agricultural University, Chengdu 611830, China
Ruixiang Li: SWUFE-UD Institute of Data Science, Southwestern University of Finance and Economics, Chengdu 611830, China

Sustainability, 2025, vol. 17, issue 17, 1-30

Abstract: As one of the main sources of global greenhouse gas emissions, the low-carbon transformation and emission reduction in the construction industry are inevitable requirements for addressing climate change. Under cap-and-trade regulations, Carbon emission rights have become a key production factor. However, the price of carbon emission rights is highly random. Taking the EU carbon market in 2024 as an example, the carbon price fluctuated by more than 35%, soaring from 65 euros per ton to 80 euros per ton and then falling back. Such sharp fluctuations not only increase the cost uncertainty of enterprises but also complicate the investment decisions for emission reduction. Therefore, enterprises can enhance the flexibility of carbon emission rights trading decisions through option strategies, helping them hedge against the risks of carbon price fluctuations, and at the same time improve market liquidity and risk management capabilities. Against this background, based on the carbon cap-and-trade policy, this paper introduces the two-way option strategy into the construction supply chain game model composed of general contractors and subcontractors, and studies to obtain the optimal carbon reduction volume, carbon option purchase volume, maximum expected profit of general contractors, subcontractors and profit distribution ratio. This study shows that two-way options play a crucial role in optimizing supply decision-making and emission reduction strategies. Under the decentralized model, emission reduction responsibilities are often shifted to subcontractors by the general contractor, resulting in a decline in overall mitigation effectiveness. Furthermore, appropriately lowering the carbon emission benchmark can strengthen enterprises’ incentives for emission reduction and significantly enhance the profitability of the supply chain. The study further suggests that general contractors should enhance their competitiveness by developing environmentally friendly technologies and improving their ability to reduce emissions on their own. Meanwhile, subcontractors need to actively participate in the collaborative efforts through revenue-sharing contracts. This study reveals the strategic value of two-way carbon options in construction supply chain carbon trading and provides theoretical support for the formulation of carbon market policies, contributing to the low-carbon transition of the construction supply chain.

Keywords: construction supply chain; two-way carbon options; cap-and-trade; Kuhn-Tucker conditions (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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