Operational decisions to curb emissions

Summary

Environmental challenges (especially air pollution and carbon emissions) are placing rapid economic development at risk. Carbon-intensive industries are one of the largest contributors to pollutants such as sulfur dioxide, ammonia and methane, which pose the greatest harm to public health and the economy.

To move to a low-carbon future, material efficiency and cleaner production technologies play a significant role in helping to curb industrial emissions and pollutants, particularly for carbon-intensive industries such as aluminium, cement, glass and textiles.

A green production strategy aims to improve manufacturers’ profitability through eco-friendly materials and cleaner manufacturing technologies (processes). In reality, pollution control can deliver only a partial solution from the perspective of environmental protection.

Green production means that firms transform their input (raw material use) and output (product disposition) processes with the minimum environmental impact. This notion implies that the green production strategy focuses on minimising the impacts of manufacturing processes on the environment. Thus, manufacturing firms must rethink their production and sourcing strategies.

Key researchers

Project background and aims

Human activities have brought huge challenges, particularly the phenomenon of global warming, to the sustainable development of Earth. Curbing greenhouse gas emissions is considered as a significant way to develop sustainability worldwide. To help improve their environmental responsibility, firms are taking action to reduce their impact on CO2 emissions by conducting sustainable development programs in their businesses and operations.

In practice, carbon pricing schemes (such as emissions trading and a carbon tax) have been implemented in several countries to incentivise carbon-intensive firms to improve sustainability by adopting cleaner production technologies or using eco-friendly materials. Constrained by carbon pricing schemes and regulations, firms are under tremendous pressure to respond to business activities, such as sourcing, production, and pricing decisions.

Additionally, the majority of manufacturers operate in a competitive environment and must also factor in their competitors’ strategies. Therefore a manufacturer needs to consider its competitor’s strategy, environmental regulations, and consumer preferences when choosing a supplier and determining a manufacturing strategy and a production quantity.

The project aims to:

  1. Address an efficient manner in which a manufacturer designs an effective sourcing contract to maximise profits of both the manufacturer and suppliers through an incentive contract, which is constrained by the emissions trading scheme; and
  2. Analyse pricing strategies for profit-maximising suppliers and the manufacturer in a dynamic environment under the carbon tax scheme.

Methodology

  • Applied game theory models
  • Stochastic optimisation and control.

Findings

Our main finding is that the emissions rate of raw materials from the supplier can be effectively controlled when using the performance-based contract. The incentive contract works smoothly when the manufacturer invests in a procurement relationship with a supplier to drive sustainable improvements throughout the supply chain.

Although the manufacturer may have sufficient emission allowances under a cap-and-trade policy, it still prefers to choose the green production strategy rather than consuming these available allowances and resorting to prioritising lower production and sourcing costs.

The manufacturer can understand how to design attractive contracts to jointly maximise profit and emissions trading benefits. To avoid losing business volumes, the manufacturer needs to adjust its pricing strategy and make a dynamic decision based on the real-time emissions level and the price of the carbon tax.

The suppliers can also have a better understanding of methods for maintaining or increasing their market shares and the mutual effects of the strategies on the manufacturer and suppliers.

For a price auction with a carbon emission target, a supplier only aims at bidding by providing the most attractive price. In a performance-based auction, a supplier has to bid by providing both attractive prices in consideration of its production cost and green degree simultaneously.

Output

Funding information

  • Monash Business School 2018 New Academic Staff Support Grant Scheme.