Tax or subsidy? The impact assessment of environmental policies on carbon allocation and emissions abatement of prefabricated construction supply chain

Abstract

The construction sector, as the prime culprit that aggravates greenhouse gas emissions, has initiated transitions in construction methods for emissions abatement. In such a context, prefabricated construction has been widely promoted in developing countries. This paper assesses the effects of three environmental policies: carbon tax, green subsidy, and unit subsidy on carbon allocation and emissions abatement of prefabricated construction supply chain (PCSC) consisting of a prefab manufacturer (PM) and a project developer (PD). In our game model, the PD determines a prefabricated ratio, the ratio of prefabs to the total construction components, and purchases prefabs from the PM for assembly construction, which enables fewer emissions than on-site construction. We find that the carbon tax has a compound pass-through effect in PCSC, which imposes a quasi-subsidy effect on the PD, allowing the PM to achieve a prefab premium and thus inducing more intense double marginalization than that under the green subsidy. The unit subsidy holds a cost-compensating effect, which mitigates double marginalization arising from the spill-over effect of the green subsidy. Nevertheless, both subsidies lead to identical carbon allocation and emissions abatement of PCSC. The carbon tax outperforms subsidy policies in reducing total emissions and emission intensity, and is superior in responsibility-benefit balance in PCSC. Our study offers insights into the government's choice of environmental policies and the sustainable production decisions of PCSC members while, theoretically, contributing to the sustainable supply chain theory by revealing the impacts of environmental policies on the supply chain for transitional green products, such as PCSC.

Keywords: Carbon tax; Environmental performance; Environmental policy; Game theory; Prefabricated construction.