Sustainability-Driven Green Strategy Choices of Two Risk-Averse Competing Carriers Under Policy and Cost Uncertainty

Carbon emission reduction decisions are subject to risks for shipping carriers. These include policy uncertainty (an upcoming policy may be stringent or lenient) and cost uncertainty (the operation cost may increase or decrease in the future). This paper develops a two-period game model to study the carbon emission reduction strategy choices of two risk-averse shipping carriers facing both policy uncertainty and cost uncertainty, with the goal of advancing sustainable maritime transport. They can choose a high- or low-carbon emission reduction strategy in period 1. Whether they need to upgrade in period 2 depends on the strategy they choose in period 1 and the policy implemented in period 2. The results show that in a deterministic environment, a high-cost strategy translates directly into a high-price strategy. However, in period 2, when the policy is lenient, adopting a high-carbon emission reduction strategy does not always result in a higher price than adopting a low-carbon emission reduction strategy. This result is counterintuitive. In addition, the carrier adopting a high-carbon emission reduction strategy does not necessarily set a higher price than the competitor who adopts a low-carbon emission reduction strategy. The market share plays an important role in shaping the equilibrium. When the possibility of a stringent policy is extremely low or extremely high, both carriers will choose an identical strategy. However, when the possibility is medium, they will choose differentiated strategies. The carrier with a bigger market share can tolerate a higher possibility of an upcoming stringent policy than the competitor. The degree of cost volatility also has a significant impact on the equilibrium. Its influence is particularly pronounced under a moderate probability of a stringent policy. Shippers’ carbon emission sensitivity also has a positive effect on encouraging carriers to choose a greener strategy. Our findings provide actionable insights for policymakers and industry stakeholders to facilitate the sustainability transition of the shipping sector through appropriate policy design.