Incentives and Emission Responsibility Allocation in Supply Chains

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. This paper was accepted by Jayashankar Swaminathan, operations management.