A cooperative game strategy for designing sustainable supply chains under the emissions trading system

Abstract

The objective of supply chain (SC) management is to be efficient and cost-effective across the entire system, which involves integration of suppliers, manufacturers, warehouses and stores (Simchi-Levi et al., 2000). However, as well as other topics related to industrial development, SC networks demand the application of the sustainability principles during their process design. One major motivation for this trend is the growing environmental concerns regarding climate change, which has led governments to adopt specific policies to reduce greenhouse gas (GHG) emissions. One of these policies are market-based instruments to reduce emissions, which can also represent a financial incentive for companies. In this sense, in 2005 it was launched the European Union Emissions Trading System (EU ETS), which aims to reduce GHG emissions by at least 40% from 1990 levels by 2030 (European Comission, 2014). Although the EU ETS was the world’s first international emissions trading system, there are other national systems already operating, which the EU cooperate with through the International Carbon Action Partnership (ICAP). The ETS is based on the cap-and-trade principle, which consists on setting a cap on the total amount of GHG that can be emitted by installations covered by the system. Within the cap, the companies receive emission allowances each year which they can trade with as needed. Each allowance provides companies the right to emit one ton of CO2. If a company’s emissions are higher than the number of allowances free allocated by the government, it can buy more from another company with allowances surplus. The cap is reduced annually by a linear reduction factor, so total emissions fall over time. The current method of allocating allowances is auctioning. According to the EU ETS Directive, at least 50% of the revenues generated from the auctioning of allowances should be used for climate and energy purposes (European Comission, 2017).