Going solo or joining forces? Carbon emission reduction strategies for manufacturers under carbon cap-and-trade regulation in a circular economy context

As countries strengthen commitments to net-zero emissions, remanufacturing has become an important circular-economy strategy for carbon reduction. Under carbon cap-and-trade (CCT) regulation, original equipment manufacturers (OEMs) face a strategic choice among three remanufacturing modes: in-house remanufacturing (RH), fixed-fee licensing (LF), and royalty licensing (LR). Carbon allowances and trading prices directly influence costs and incentives associated with these strategies. The RH strategy requires OEMs to invest in carbon reduction technologies for new products while simultaneously conducting remanufacturing, whereas the LF and LR strategies focus solely on carbon reduction for new products. This study develops a game-theoretic model to examine how the carbon-compliance advantage of remanufactured products affects OEMs’ strategic choices and how these choices interact with policymakers’ welfare and environmental objectives. The results indicate that licensing strategies are preferred when the carbon-compliance advantage of remanufactured products is either low or high, while the RH strategy is optimal when the carbon-compliance advantage lies within an intermediate range. Policymakers are generally more inclined to support licensing strategies than RH. Furthermore, more favourable carbon-allocation benchmarks for remanufactured products can stimulate remanufacturing activities and reduce emissions associated with new-product production, thereby supporting climate mitigation and net-zero targets.