Optimal sustainability investment and pricing decisions in a two-echelon supply chain with emissions-sensitive demand under cap-and-trade policy

With the alarming increase in global warming, business activities are being modified by green/sustainable initiatives through immense research. This paper considers a sustainable supply chain which consists of a supplier and a manufacturer. The market demand is emissions-sensitive besides dependent on the selling price and sustainability levels of the supplier and the manufacturer. To maintain the sustainability level of the whole supply chain, both the supply chain entities make investments. The decision behaviors of the centralized and the decentralized channels are compared and a two-part tariff contract is implemented to coordinate the supply chain under the cap-and-trade policy. It is found from the numerical study that the total profit in the centralized system is almost 10% higher than that of the decentralized system. Further, the two-part tariff contract leads to a perfect channel coordination. Sensitivity analysis is performed to examine the effects of key model-parameters on the optimal decisions.