The impacts of carbon insurance on supply chain and environment considering technology risk under cap-and-trade mechanism

Carbon insurance is an emerging green financial instrument, which makes significant differences in spreading the failure risk of innovative but immature carbon reduction technology, thereby ensuring enterprises for low-carbon transition. We consider a carbon insurance supply chain including a manufacturer and an insurer. The manufacturer produces and sells a product to customers. To reduce carbon emission and thus save cost under cap-and-trade mechanism, the manufacturer invests in a new but immature carbon reduction technology, and he purchases a carbon insurance from the insurer to hedge the failure risk. We first reveal that carbon insurance can lower the manufacturer’s entry barrier of green investment, attracting more firms, especially small and medium-sized enterprises, to adopt carbon reduction technology. Besides, the manufacturer buying carbon insurance produces more products and earns more profit than not buying. For the environmental impacts, the compensation mode of carbon insurance takes an important role. The carbon insurance can further reduce carbon emissions under a certain condition if the insurer compensates the manufacturer with carbon. However, it always leads to higher carbon emission if the insurer compensates the manufacturer with funds. The impacts of carbon insurance also are influenced by the strategic choice of the insurer. The manufacturer earns the most profit and emits the most carbon if the insurer is non-strategic. In contrast, the manufacturer earns less but emits less carbon if the insurer is strategic. Meanwhile, carbon insurance can play a better role in reducing carbon emissions when the manufacturers volunteer to reduce carbon emissions but are not government-mandated. Finally, we provide corresponding management implications for different situations.