Do cap-and-trade policies drive environmental and social goals in supply chains: Strategic decisions, collaboration, and contract choices

This paper studies a manufacturer-retailer channel selling complementary green products under the cap-and-trade policy and analyzes strategic decisions in these settings. While the manufacturer faces government mandated cap-and-trade norm, the retailer invests in corporate social responsibility through selling of green products. In this study, we conduct a comparative analysis of the players’ decisions under centralized and decentralized scenarios and explore the role of cap-and-trade policy in influencing decision outcomes. Further, three contracts are proposed to improve channel performance, namely, the two-part tariff, corporate social responsibility (CSR) effort sharing, and green cost sharing contracts. The results show that collaboration among the supply chain players through contracts supports green initiatives vis-à-vis the decentralized channel. However, given a choice of contracts, the channel prefers those contracts from which the manufacturer accrues direct benefits because he incurs greening costs. The results further demonstrate that carbon markets play an important role in influencing green initiatives, particularly, under high trading prices, where manufacturers are incentivized to improve their product offerings. Further, the cap-and-trade policy influences retailers to work toward building higher reputation and brand value through investments in higher CSR effort. From a retail price perspective, we find that consumers benefit under higher trading prices because the benefits of carbon surplus and higher revenues of the supply chain players result in lowering the prices for consumers. However, it is in contrast to studies on the decentralized channel outcomes or environmental taxation because in both the scenarios, greening or CSR costs get transferred to the consumers in the form of higher prices.