On regulating transportation emission via personal and corporate carbon trading: A game-theoretic approach

Abstract

<p>The transportation sector is a major contributor to global greenhouse gas emissions, comprising about a quarter of the total global greenhouse gases. Various technological and policy-based strategies have been employed to reduce carbon emissions in the transportation sector, such as developing green vehicles, promoting the adoption of electric vehicles, encouraging public transit travel, and implementing tolls. Despite these measures, global carbon emissions in transportation persistently increase. Therefore, in accordance with the Paris Agreement, some countries leverage market mechanisms to attain their emission reduction objectives. This has led to the establishment of emission trading systems (ETSs), enabling corporations to buy or sell carbon credits for the purpose of offsetting their carbon emissions.<br><br>Currently, several countries have incorporated the transportation sector into their ETSs. Within these ETSs, two regimes are proposed to regulate transportation emissions: upstream regime and downstream regime. Under the upstream regime, automotive fuel distributors are responsible for the emissions produced by their products. While, the downstream regime directly regulates the actual end emitters. In practice, the upstream regime is more commonly adopted due to its easier implementation. Nevertheless, the end emitter-based downstream regime could significantly extend ETS entities, expanding beyond transportation service operators to include individual urban commuters, which yields a personal carbon trading scheme and may further facilitates the effectiveness of carbon reduction in the transportation sector.<br><br>Existing studies on transportation sector-incorporated downstream ETS mainly focus on evaluation of trading mechanism and policy, vehicular emission monitoring and credit charging system design, and initial allocation strategy for carbon credits. However, how the introduction of transportation sector-incorporated ETS with personal carbon trading scheme would impact travelers’ mobility patterns, operation strategies of transportation service operators, and the overall transportation system performance is still unclear. This study proposes an analytically tractable framework to bridge this gap.<br><br>The proposed research questions and problem setting are as follows. We consider an ETS that includes the transportation sector. Under this ETS, there are two carbon credit trading markets: Personal Trading Market (PTM) and Corporate Trading Market (CTM). Carbon credits are non-transferable between PTM and CTM, and the credit price of each market is governed by its own supply-demand conditions. In the PTM, travelers trade carbon credits that are initially allocated by the government. Travelers are classified into three groups: petrol vehicle (PV) owners, electric vehicle (EV) owners and vehicle-less travelers. PV and EV owners may either choose driving or public transit (operated by one transit operator) based on travel costs of each mode, while the vehicle-less travelers only take public transit. Each PV trip generates carbon emission of kiloton due to direct tailpipe emissions. Each EV trip produces kiloton of emissions resulting from indirect charging and electricity production. To engage PV/EV travel, travelers have to offset the associated emission through carbon credits. Taking public transit is considered to produce zero individual emissions, thereby requiring zero credits. However, the transit operator is responsible to offset emissions from transit services.<br><br>The CTM only enables companies/organizations to trade their carbon credits allocated by the government. In this study, we specifically examine the participation of the transit operator in the CTM. The carbon emissions of the transit operator arise from the operation of transit fleets. These emissions are characterized as an increasing function of the transit service frequency. The transit operator determines the optimal fare and service frequency in compliance with the emission trading scheme. If the transit operator exhausts its allocated credits for offsetting emissions, it has to purchase additional credits from the CTM. Conversely, if the transit operator possesses excess credits, it has the opportunity to generate additional revenue by selling them in the CTM.<br><br>With the aforementioned setting, the following questions will be explored. (1) How will the ETS influence travelers’ mode choices? (2) What will be the government’s optimal carbon credit allocation strategy for the three groups of travelers and the transit operator to achieve emission reduction goals without compromising on the transportation system performance? (3) How will the transit operator change its optimal transit fare and transit service frequency when the ETS is introduced?<br><br>The methodology for addressing these problems is as follows. We propose a Stackelberg model, where the government firstly determines the credit allocation strategy. Then, the transit operator receives credits and optimizes transit fare and transit frequency accordingly. Following that, the travelers with carbon credits observe transit operators’ operation decisions and make mode choice decisions in order to minimize their travel costs. The government’s problem is to minimize the overall travel cost of the transportation system, while adhering to an equality constraint that guarantees the total allocated carbon credits are equal to the targeted carbon emissions for the transportation system. The objective of the public transit operator is to maximize its profit which is determined by revenue from fares, operating costs, and revenue/expenditure associated with carbon trading. The mode choice pattern of travelers under equilibrium conditions is determined by solving the variational inequality formulation, while incorporating the equilibrium conditions of the personal trading market. To solve the Stackelberg game analytically, the backward induction approach is applied. Furthermore, we propose an augmented Lagrangian approach to solve the Stackelberg equilibrium under a numerical setting. A series of sensitivity analysis regarding the government’s emission reduction goal, travelers’ value of times and carbon price in the CTM are also conducted.<br><br>The expected results are as follows. (1) With the ETS, more travelers might shift to public transit mode. (2) The vehicle-less travelers might have the largest number of carbon credits, followed by EV owners and PV owners, because the government may impose more strict restrictions on travelers with greater emissions. (3) The transit operator might decrease the transit frequency to reduce emission and lower the transit fare to enhance the ridership. (4) When the ETS is introduced, the total transportation system travel cost might be increased as more travelers might shift to the public transit mode but the overall system-wise emission may be reduced.</p>