Supply chain coordination: the application of consignment and zero wholesale price contracts under customized cap-and-trade and consumers' environmental awareness

Abstract

PurposeWithin a framework of supply chain (SC) coordination, this paper analyzes a green SC consisting of a retailer and a manufacturer, under government incentives and legislations and the consumer environmental awareness. To mitigate carbon emissions and promote the sustainability of the SC, a customized carbon emission trading mechanism is developed.Design/methodology/approachA game-theoretical decision model formulated determines the optimal sustainability level and the optimal quota of carbon credit from the ceiling capacity set by the government. In order to coordinate the SC and optimize environmental decisions, a novel combination of consignment and zero wholesale price contracts is proposed.FindingsAnalytical and numerical analyses conducted highlight that the proposed contract generates a Pareto improvement for both channel members, boosts the profit of the green SC, enhances the sustainability level of the channel and contributes to a reduction in the requested carbon emission credit by the manufacturer.Social implicationsWith the proposed mechanism, governments can protect their industries and, more importantly, comply with European Union (EU) rules on annually reducing emission ceilings allocated to industries.Originality/valueDifferent from previous studies on cap-and-trade strategies, the proposed mechanism enables companies to select lower emission quota/allowances than the maximum amount set by the government, and in return, companies can benefit from several incentive strategies of the government.