The impact of contract types on carbon-capped food supply chains: options versus wholesale

Given the rising awareness of environmental issues and the growing demand for eco-friendly food products, stakeholders within the food supply chain are investing more in green technologies to reduce carbon emissions. However, the efficacy of carbon caps in achieving emission reductions is challenged by unpredictable consumer demand, complicating both emission control and supply chain efficiency. This study investigates a scenario involving a food supply chain with an environmentally responsible supplier and a retailer facing demand fluctuations. We explore the incentives for suppliers to adopt option contracts and evaluates their impact on carbon emissions through a Stackelberg game model with strict carbon emission caps. Our analysis reveals that while higher green investment generally enhances supplier profitability, it may not always benefit retailers. Although option contracts can improve supply chain efficiency, they might also lead to increased carbon emissions and food waste. Notably, when green investments are decision-based, option contracts tend to encourage greater investments than wholesale contracts, helping to mitigate the financial burdens of high costs. This trend persists even in competitive markets. Our research suggests that option contracts can effectively balance the dual objectives of maintaining supply chain performance and complying with carbon emission limits.