A Bilevel Model for Carbon Pricing in a Green Supply Chain Considering Price and Carbon-Sensitive Demand

Abstract

In today’s industrial landscape, there is a mounting urgency to mitigate the adverse environmental impacts of emissions stemming from supply chain operations. On one front, policy-makers impose increasingly stringent emission reduction targets for supply chains, while on another front, consumers express a heightened preference for products and services with reduced carbon footprints. This study addresses the challenge of determining an optimal carbon pricing strategy by integrating the imperatives of a green supply chain with carbon taxation policies. To this end, we introduce a bi-level mixed-integer linear programming model for supply chain network planning, encompassing considerations of carbon taxation policies and the responsiveness of demand to the final product’s price and associated carbon emissions. Findings from a case study underscore that an escalation in carbon pricing prompts the supply chain to prioritize emissions reduction through the utilization of environmentally conscious approaches. The results reveal the need for a USD 0.9/kg carbon price to achieve a 10% emission reduction, resulting in an 80% profit decline. Notably, a 10% reduction has profound impacts, which leads to the suggestion of a gradual approach. Furthermore, as carbon prices reach higher levels, the supply chain tends toward curtailing production, thereby fostering an environment conducive to emission abatement. Consequently, policy formulators must judiciously calibrate a fitting carbon pricing mechanism to strike a harmonious equilibrium between emission reduction targets and the financial outlays of the supply chain.