Emission-dependent supply chain and environment-policy-making in the ‘cap-and-trade’ system

The paper focuses on a so-called emission-dependent supply chain consisting of one single emission-dependent manufacturer and one single emission permit supplier in the ‘cap-and-trade’ system, where emission permit becomes requisite for production. We consider the emission cap of emission-dependent manufacturer allocated by the government as a kind of environmental policy and formally investigate its influence on decision-makings within the concerned emission-dependent supply chain as well as distribution fairness in social welfare. It is proved that the system-wide and the manufacturer's profits increase with the emission cap while the permit supplier's decreases. There is room for manufacturer and permit supplier to coordinate the supply chain to get more profit in a certain condition.

► We model an emission-dependent supply chain with a permit supplier and a firm.
► We game-theoretically analyze their optimal decisions in a ‘cap-and-trade' system.
► It is possible to coordinate the supply chain in a certain condition.
► The effect of emission cap as an environment policy is considered.
► Bernoulli–Nash Social Welfare Function is employed to analyze the optimal cap.