Impact of carbon quota allocation on outsourced remanufacturing supply chain: Designing a coordination mechanism

Outsourcing remanufacturing has emerged as a pivotal strategy for Original Equipment Manufacturers (OEMs) aiming to navigate the low-carbon transition while capitalizing on remanufacturing benefits. However, little attention has been given to the ramifications of government-enforced carbon trading regulations, specifically the impacts of different carbon quota allocations—grandfathering and benchmarking—on OEMs' outsourcing decisions and Outsourcing Remanufacturers (ORs). Grandfathering involves allocating total carbon quotas based on historical emission data of the enterprise, while benchmarking sets a foundational carbon quota considering the collective emission level of the sector. Addressing this research gap, our study investigates the implications of diverse carbon quota allocation systems on the outsourcing remanufacturing supply chain. Moreover, we explore coordination mechanism designs to optimize profit distribution and enhance cooperation between OEMs and ORs under different carbon quota restrictions. Our analysis includes game models representing centralized and decentralized structure between OEMs and ORs under grandfathering and benchmarking. Building on these models, we extend the analysis to a two-stage dynamic setting where Stage-1 sales determine Stage-2 carbon quotas and recovery volumes, thereby capturing intertemporal interactions between OEMs and ORs. Our key findings are as follows: 1) Grandfathering provides stronger incentives for remanufacturing and conditional benefits for OEMs. Compared with benchmarking, grandfathering more effectively promotes ORs to gain additional revenue by encouraging higher recovery rates and remanufactured sales. OEMs achieve higher profits under either allocation rule once their total quota exceeds a certain threshold, but the profit advantage is more pronounced under grandfathering. 2)Allocation rules create a clear policy trade-off. Grandfathering leads to higher recycling rates and greater emission reduction, whereas benchmarking results in lower product prices and higher consumer surplus—preferred when social welfare is emphasized. 3)This study proposes a cost-sharing–fixed outsourcing fee mechanism that enhances supply-chain efficiency. When applied within an appropriate cost range, this mechanism optimizes profit distribution between OEMs and ORs and restores efficiency. Moreover, the two-stage analysis shows that larger total quotas (or smaller benchmark quotas) magnify these effects over time, resulting in higher recycling rates, greater remanufactured sales, and improved profitability for both parties.