The impact of supply chain coordination on the enviroment

Abstract

Emission regulating mechanisms have been proposed by the policy makers to reduce the carbon emissions resulting from the industrial activities. We study the channel coordination problem of a two-level supply chain (i.e., a buyer and a vendor) under emission regulations. We first analyze a two-echelon chain that operates to meet the deterministic demand of a single product in the infinite horizon using a lot-for-lot policy under cap and trade, carbon tax and carbon cap policies. We analytically show and numerically illustrate that the average annual emissions of the system do not necessarily decrease when the buyer and the vendor make coordinated decisions. This implies coordination may not be good for the environment in terms of emissions related performance measures. We further extend our analysis under the emission regulating mechanisms mentioned above for a two-level supply chain in which the buyer operates to meet the stochastic demand of a single product. In both deterministic and stochastic demand settings, we propose coordination mechanisms including quantity discounts, fixed payments, carbon-credit sharing and carbon-credit price discounts that compensate the buyer’s loss when the system’s costs are minimized or profits are maximized.