Collaborative mechanism of a sustainable supply chain with environmental constraints and carbon caps

Negative impacts on environment such as carbon emissions and pollution resulting from the business activities of firms in a supply chain have attracted great attention worldwide. Hence, one of the crucial issues for supply chain management is the trade-off between economic objectives and environmental sustainability. This paper focuses on investigating the government policy incentive mechanism, with which supply chain members are motivated to work collaboratively to reduce carbon and pollutant emissions by investing in producing environmental-friendly products (EFP). Such a mechanism affects the transfer price through negotiation between the supply chain firms, and consequently it has an impact on the supply chain׳s value transition and profit allocation. A collaborative supply chain decision-making framework is formulated with environmental constraints and carbon caps; its objective is to maximize the net present value of an integrated supply chain as well as satisfy the interests of its individual members. Our key contribution lies in exploring a decision-making mechanism for an environmentally sustainable supply chain that is jointly constrained by environmental carrying capacities and carbon caps, and also takes into account government policy incentives. The results show that collaboration between supply chain members plays a crucial role in improving their environmental performance, as the transfer price is determined through negotiations to share government subsidies to satisfy the individual interests of supply chain members while the level of pollutants and carbon emissions are in compliance with environmental standards.