Sustainability investment under cap-and-trade regulation

Ciwei Dong, Bin Shen, Pui Sze Chow, Liu Yang, Chi To Ng

Research output: Journal article publicationJournal articleAcademic researchpeer-review

278 Citations (Scopus)


Carbon emission abatement is a hot topic in environmental sustainability and cap-and-trade regulation is regarded as an effective way to reduce the carbon emission. According to the real industrial practices, sustainable product implies that its production processes facilitate to reduce the carbon emission and has a positive response in market demand. In this paper, we study the sustainability investment on sustainable product with emission regulation consideration for decentralized and centralized supply chains. We first examine the order quantity of the retailer and sustainability investment of the manufacturer for the decentralized supply chain with one retailer and one manufacturer. After that, we extend our study to the centralized case where we determine the production quantity and sustainability investment for the whole supply chain. We derive the optimal order quantity (or production quantity) and sustainability investment, and find that the sustainability investment efficiency has a significant impact on the optimal solutions. Further, we conduct numerical studies and find surprisingly that the order quantity may be increasing in the wholesale price due to the effects of the sustainability and emission consideration. Moreover, we investigate the achievability of supply chain coordination by various contracts, and find that only revenue sharing contract can coordinate the supply chain whereas the buyback contract and two-part tariff contract cannot. Important insights and managerial implications are discussed.
Original languageEnglish
Pages (from-to)509-531
Number of pages23
JournalAnnals of Operations Research
Issue number2
Publication statusPublished - 1 May 2016


  • Cap-and-trade regulation
  • Carbon emission
  • Supply chain coordination
  • Sustainability

ASJC Scopus subject areas

  • General Decision Sciences
  • Management Science and Operations Research


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