Carbon pricing versus emissions trading: A supply chain planning perspective

Abstract

Carbon pricing (taxes) and carbon emissions trading are two globally practiced carbon regulatory policy schemes. This paper presents an analytical supply chain planning model that can be used to examine the supply chain performance at the tactical/operational planning level under these two policy schemes. Model implementation and analyses are completed using actual data from a company operating in Australia, where these environmental regulatory policies are practiced. Numerical results provide important managerial and practical implications and policy insights. In particular, the results show that there are inflection points where both carbon pricing and trading schemes could influence costs or emissions reductions. An erratic nonlinear emissions reduction trend is observed in a carbon pricing scheme as the carbon price increases steadily; whereas emissions reduction in a carbon trading scheme follows a relatively linear trend with a nonlinear cost increase. Overall, a carbon trading mechanism, although imperfect, appears to result in better supply chain performance in terms of emissions generation, cost, and service level; even though a carbon tax may be more worthwhile from an uncertainty perspective as emissions trading costs depend on numerous uncertain market conditions.