ISSN 1750-9653, England, UK International Journal of Management Science and Engineering Management, 5(1): 30-38, 2010 http://www.ijmsem.org/ Carbon market sensitive sustainable supply chain network design Amar Ramudhin * , Amin Chaabane , Marc Paquet Department of Automated Manufacturing Engineering, ´ Ecole de Technologie Sup´ erieure, Montreal H3C 1K3, Canada (Received 10 February 2009, Revised 24 July 2009, Accepted 28 November 2009) Abstract. Sustainable Supply Chain Network Design involves taking into account social, economic and environmental objectives at design time. While the social dimension is sometime harder to capture or quantify in mathematical terms, the Emission Trading Schema (ETS) introduces a natural trade-off between the economic and the environmental dimensions. This article addresses the design of supply chains that are also sensitive to the carbon market. Carbon emissions and total logistics costs are integrated in the design of the supply chain using a multi-objective mixed-integer linear programming model that is solved by goal programming. The proposed methodology provides decision makers with the ability to evaluate the trade-offs between total logistics costs and carbon offsetting under different supply chain operating strategies, environmental regulatory constraints and carbon market evolution. The approach is presented through an illustrative example derived from the steel industry where new legislation imposes regulatory carbon caps on emissions. The results show that this approach is a good starting point for a more comprehensive framework for sustainable supply chain network design. Keywords: operations management, environmental studies, mathematical programming, goal programming 1 Introduction Sulphur dioxide caps for electric utilities in the United States, regulatory carbon dioxide caps for companies across the European Union, and domestic regulatory framework for greenhouse gases (GHGs) reduction in Canada and Aus- tralia, are only a few of the numerous regulations on air emissions that exist today. Corporations are realizing that GHGs reduction strategies and sustainability policies are bottom-line issues. The Aberdeen Group argues through a survey of 300 firms worldwide that Corporate Social Re- sponsibility (CSR) and Sustainable Supply Chain Manage- ment (SSCM) are on the top of the “green agenda” (Nari et al., 2008 [19]). Their benchmark also demonstrates that 50% of the corporations surveyed are planning to redesign their supply chain to be more sustainable and almost 80% of them have to comply to new environmental regulations. As a consequence, corporations are facing new realities and need to consider fundamentally changes in order to meet their legal obligations. Ideally, corporations should re- duce their emissions through sustainable actions such as the implementation of energy efficiency measures, the deploy- ment of carbon capture and storage systems, or investing in other emissions reduction technologies. Also, companies can have access to other compliance mechanisms to earn carbon credits such as the contribution to climate change technology fund or through an Emission Trading Scheme (ETS). ETS is based on a “cap-and-trade” approach where GHGs emission caps are enforced. Companies that reduce emissions below the cap would be allocated tradable cred- its. Those corporations that exceed their cap need to buy an equivalent amount of carbon credits to meet their regu- latory obligation. The trading of emissions under a “cap-and-trade” sys- tem places supply chains managers in a different situa- tion when compared with the traditional control approach. First, corporations must consider internally available op- tions that might reduce GHGs and meet the “cap”. Sec- ond, they should compare the cost of implementing some of these options with the current trading price of carbon emissions since, under the “cap-and-trade” system, it is a simple choice between make or buy. This means that com- panies could make the reduction in their supply chains or buy credits from someone who has done more than the re- quired by his cap (Labatt and White, 2007 [13]). In practice, the implementation of such an approach by supply chain managers is more complex. There are many options available at all stages of the supply chain (prod- uct design options, process options, transportation options, etc.) and a comprehensive sustainable supply chain design framework that combines economic decision-making strate- gies with GHGs reduction options and the options provided by the various regulatory carbon market-based mechanisms would be very useful. Seuring and Muller (2008) [24] defined sustainable sup- ply chain management as ’the management of material, in- formation and capital flows as well as cooperation among companies along the supply chain while taking goals from all three dimensions of sustainable development, i.e., eco- nomic, environmental and social, into account which are derived from customer and stakeholder requirements’. We adopt this definition and Fig. 1 shows such a framework that incorporates all three dimensions of sustainability: eco- nomic, social and environmental. Here supply chain eco- nomics is taken into consideration by minimizing the total logistic cost or maximizing the profit over the different sup- * Correspondence to: E-mail address : Amar.Ramudhin@etsmtl.ca. ©International Society of Management Science And Engineering Management® Published by World Academic Press, World Academic Union