Low-carbon supply chain coordination through dual contracts considering pareto-efficiency

Abstract

ABSTRACT Considering the growing green awareness and increasingly stringent emission regulations, heavy-emitting supply chains are required to re-schedule their operations for environmental responsibility. Although coordination helps the supply chains overcome the decentralised disadvantages to achieve desirable profits, literature considering option contracts under emission constraints, especially combining warehousing contracts, remains scarce. This paper fills this research gap with the novelty in the dual-contract-coordinated decision analysis for achieving profit maximum and emission reduction targets considering customers’ green awareness through option and warehousing contracts, based on the originality of using the Lagrange-Stackelberg optimisation method, which overcomes the difficulty in expressing the first-mover’s decisions and simplifies the problem-solving process. Analytical and numerical results show that Pareto-efficient coordination can be fully achieved by the option contract if the warehousing contract ensures the same inventory costs before and after coordination. Otherwise, partial coordination also raises insiders’ profitability only through the option contract. Purchasing extra emissions with green investment is the best in most cases. The contract-maker should deliberate its contract settings including the option and wholesale prices, as well as warehousing, to develop Pareto-efficient coordination. Sustainability comes at a cost, but coordination raises profitability and emission mitigation in a well-built ETS market.