Supply chain sustainability through dual option contracts under emission trading systems

Carbon finance integrates environmental objectives with economic activities for sustainable operation. Previous scholars predominately concentrated on sustainability through either coordination or carbon policies. However, studies on their synergistic effects, particularly involving interactions between regulatory bodies and supply chain members, remain scarce. The present research fills this research gap by using call options to coordinate supply chain members and issuing put options to alleviate heavy-emitters’ financial pressure on emission mitigation. Its novelty lies in (a) being the first to apply put options in carbon finance and (b) integrating carbon market development with low-carbon supply chain operations using dual option contracts. Game-theoretical models are built with consideration of demand uncertainty and customer green awareness. Equilibria are analytically given with numerical findings. Findings reveal that emission put options and product call options play distinct yet complementary roles in hedging risks and improving profitability with sustainable goals. Leveraging put options to strategically set emission prices is a more efficient way to achieve better returns with minimal financial burden, compared to efforts into increasing customer green awareness. Interestingly, emission regulations, traditionally viewed as burdensome, potentially improve profitability through more sustainable operations under well-designed emission trading mechanisms, which reduces heavy-emitters’ reluctance toward emission reduction.