Balancing incentives and sanctions: A prospect theory-based tripartite game on carbon tax dynamics

The carbon tax policy has emerged as a crucial instrument in the global effort to mitigate climate change by incentivizing the reduction of carbon dioxide emissions. However, in the actual situation where policy makers and policy target groups are separated from each other, the imposition of carbon tax is often hampered by multiple constraints, including conflicts of interest, risk aversion attitudes, and loss aversion preferences, which lead to an underperformance of the intended policy effects. This study creates a robust three-party evolutionary game approach based on prospect theory involving the central government, local governments, and enterprises. Utilizing the proposed replication dynamics equations, the study then explores the evolution and stabilization strategies of these tripartite players. Lastly, the theoretical framework is validated through a real-world case study of China's steel industry, yielding the subsequent arguments: stakeholders' strategies evolve through ongoing refinement influenced by anticipated returns, risks, and policy efficacy; enterprises' emission reduction levels drive technology choices, particularly under low regulatory pressure; moderate political sanctions foster compliance, whereas excessive penalties provoke resistance; targeted subsidies enhance participation, but over-subsidization risks moral hazard and non-compliance; and inadequate regulatory oversight hinders strategic adjustments, particularly regarding technology upgrades and cost minimization.