Morality-driven Mechanism Design: Application in Hierarchical Carbon Trading Markets

The carbon trading market is a mechanism designed to reduce greenhouse gas emissions through economic incentives, encouraging lower carbon emissions as a means to combat global climate change. In this market, carbon quotas are pre-allocated by the government based on the production demands reported by enterprises. However, the allocation and trading decisions in such hierarchical markets may naturally favor higher-level authorities that represent global objectives, resulting in unsatisfied profits of individual enterprises. As a result, enterprises may exaggerate their production needs to obtain more carbon quotas due to the inherent selfish nature. Therefore, it is crucial to encourage truthful reporting through strategic interactions. This paper presents a morality-driven two-level min-max Stackelberg game model to balance the hierarchical objectives of diverse entities. The first layer of the game focuses on the macroscopic control of the nation’s carbon emission targets, while the second layer seeks to maximize the individual profits of enterprises. We introduce a morality-based indicator that assesses the social responsibility of enterprises, incentivizing them to genuinely adhere to the country’s emission requirements. Simulation results reveal an improved convergence rate and significant advantages in balancing the environmental and economic objectives of different entities.