Joint Economic–Environmental Benefit Optimization by Carbon-Abatement Cost Sharing in a Capital-Constrained Green Supply Chain

Abstract

This paper studies the potential of carbon-abatement cost-sharing contracts in optimizing the joint economic–environmental benefit of a green supply chain. One-way and two-way cost-sharing contracts were investigated, respectively, in scenarios in which a capital-constrained manufacturer has a dominant downstream retailer or a dominant upstream supplier. The manufacturer obtains financing from a competitively priced bank to fulfill its production, carbon-abatement investment, and even insufficient emission permit purchase given the fact that the cap-and-trade regulation exists. Results show that in both one-way and two-way cost-sharing cases, cost sharing of carbon abatement has no effect on the manufacturer’s output or its counterparty’s wholesale price decisions; however, it improves the carbon abatement level of the supply chain. As a result, such cost-sharing of carbon abatement is proven to hamper the profit of the overall supply chain, but it improves the joint “economic-environmental” benefit of the supply chain if the cost-sharing coefficient is properly chosen. Furthermore, this problem is studied in the case of consumers’ green preferences, and carbon-abatement cost sharing is also verified to have the potential to optimize joint economic–environmental benefits.