On the effectiveness of emission penalties in decentralized supply chains

Abstract

In recent years, the emission of harmful pollutants, such as greenhouse gases, due to industrial activities have received considerable interest from both business and scientific communities. As a result, an increasing number of voluntary and governmental initiatives that penalize emission generated by businesses have been witnessed. In this research, we examine the extent to which imposing penalties on the emission of harmful pollutants can successfully reduce overall emissions in decentralized supply chains. Using a buyer-vendor supply chain framework, we show that penalizing each firm for the emissions for which it is directly responsible can sometimes lead to higher overall supply chain emissions. We show that this phenomenon occurs because firms, in their efforts to reduce their own emissions, can make decisions that adversely impact the emissions of other firms in its supply chain. Moreover, we show that centralizing the supply chain contrary to what one may think at first glance is not always the appropriate solution to mitigate this effect. We provide some potential remedies and evaluate their relative effectiveness. We also present a detailed numerical example using realistic problem parameter values to examine the extent to which emission reduction efforts by individual firms are successful in reducing overall emissions.