Supply Chain Environmental Cost Internalization Mechanism

Environmental cost internalization means firms increase environmental investment to reduce/eliminate environmental pollution/damage produced in the product’s production and consumption process. The aim is to reduce/eliminate pollution at source, improve the relationship between economic development and environment protection, and promote sustainable development. As environmental issues become increasingly prominent, more and more scholors began to combine the research of supply chain management and environment management, and try to consider how to resolve environmental problems from the supply chain’s perspective. In this paper, we define supply chain environmental cost internalization as the core firms in integrated supply chain extend their internalization behavior to the supply chain and corporate with their upstream/downstream firms to improve the supply chian’s environmental performance.However, the process is influenced by and has influence on many stakeholders, such as governments, customers, the public, environmental groups, and stakeholders and so on. How to coordinate the stakeholders’interests is an important issue need to be explored. Generally speaking, there are three main stakeholders related to the prevention and control of environmental pollution, the government (the environmental property owner), the firms (the main polluters), and the public (the pollution victims and customers). We choose central government, local government, integrated supply chain and customers as the main stakeholders and illustrate how to coordinate their intersets. The relationships needed to be coordinated include:stakeholders’environmental interests and the environmental cost internalization goal; the integrated supply chain’s environmental and economic performance; the supply chain’s environmental investment behavior and the environmental sustainable constraints which includes environmental carrying capacity constraint, government policy constraint, inventory cost maximization constraint and customer constraint; the supply chain system’s interest and individual firm’s interest; government’s policy and the supply chain firms’environmental investment behavior. In order to explore how to coordinate the above relationships, this paper is carried out in the following four aspects:Firstly, we analyze the stakeholders’game process and game equibrium. In order to explore how to coordinate the stakeholders’environmental interests and the supply chain’s environmental cost internalizaiton goal, we distinguish the stakeholders’ interests and then model the dynamic game process of the central government, local government and supply chain. In the model, the customers’purchasing behavior is also considered. Through the game equilibrium analysis, we figure how the stakeholders’ behaviors are influenced by each other and analyze the game equibrium mechanism.Secondly, we analyze the supply chian’s environmental investment decision mechanism. In order to analyze how to coordinate the conflict between supply chain’s environmental and economic performance, and relationship between supply chain’s environmental investment behavior and the environmental sustainable constraints, we build an optimization model which concludes objective function of supply chain’s incremental profit net present value maximization and constraints of environmental sustainable constraints. Through the analysis of the model using Kuhn-Tucker Theory, we analyze the supply chain’s optimal quantity, price and inventory decision, and government’s optimal subsidy decision.Thirdly, we analyze supply chain’s collaborative profit allotment mechanism. In order to explore how to coordinate the conflicts between system interest and individual firms’interests, we analyze the rent contribution of each individual firm and illustrate the value transformation process caused by environmental investment. We use rent as the basis of allotment and explore the mechanism to coordinate interest conflicts.Fourthly, we analyze the government policy’s acting mechanism and regional differences. In order to analyze the relationship between government policy and firms’ environmental investment behavior, we analyze how the government policy drives and guides firms’environmental investment behavior in promoting Environmental Kuznets Curve evolution. We divide China into economically undeveloped, economically developed and ecological fragile region, and use the optimization model propsed in this paper above to test the policy’s effectiveness.This paper studied supply chain environmental cost internalization mechanism in the view of stakeholders’interests’coordination. It is theoretically significant in making the supply chain environmental cost internalization mechanism clear. Meanwhile, is practically significant in promoting firms to reduce pollution, improve the relationship between economic development and environmental protection, and promoting sustainable development.