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Incentives and Emission Responsibility Allocation in Supply Chains

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  • Sanjith Gopalakrishnan

    (Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada; Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

  • Daniel Granot

    (Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

  • Frieda Granot

    (Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

  • Greys Sošić

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

  • Hailong Cui

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089; Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455)

Abstract

Because greenhouse-gas (GHG) emissions from the supply chains of just the 2,500 largest global corporations account for more than 20% of global emissions, rationalizing emissions in supply chains could make an important contribution toward meeting the global CO 2 emission-reduction targets agreed upon in the 2015 Paris Climate Agreement. Accordingly, in this paper, we consider supply chains with joint production of GHG emissions, operating under either a carbon-tax regime, wherein a regulator levies a penalty on the emissions generated by the firms in the supply chain, or an internal carbon-pricing scheme. Supply chain leaders, such as Walmart, are assumed to be environmentally motivated to induce their suppliers to abate their emissions. We adopt a cooperative game-theory methodology to derive a footprint-balanced scheme for reapportioning the total carbon emissions amongst the firms in the supply chain. This emission responsibility-allocation scheme, which is the Shapley value of an associated cooperative game, is shown to have several desirable characteristics. In particular, (i) it is transparent and easy to compute; (ii) when the abatement-cost functions of the firms are private information, it incentivizes suppliers to exert pollution-abatement efforts that, among all footprint-balanced allocation schemes, minimize the maximum deviation from the socially optimal pollution level; and (iii) the Shapley value is the unique allocation mechanism satisfying certain contextually desirable properties.

Suggested Citation

  • Sanjith Gopalakrishnan & Daniel Granot & Frieda Granot & Greys Sošić & Hailong Cui, 2021. "Incentives and Emission Responsibility Allocation in Supply Chains," Management Science, INFORMS, vol. 67(7), pages 4172-4190, July.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:7:p:4172-4190
    DOI: 10.1287/mnsc.2020.3724
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