Carbon reduction in global supply network design subject to carbon tariffs and location-specific carbon policies

Abstract

Carbon policies are often limited to specific regions. To avoid stricter carbon emission requirements, companies relocate production to regions without carbon policies that offer a higher degree of flexibility. This effect is known as carbon leakage. To prevent carbon leakage, carbon tariffs are imposed on carbon emissions imported into regulated regions. We present a new model formulation for the design of a global supply network subject to carbon tariffs and location-specific carbon policies. Relevant carbon emissions are captured by a product carbon footprint. This model plans the locations of manufacturing plants and distribution centers and the transportation between them. In addition, we consider the choice of production technologies to enable carbon reduction. The objective is to minimize the net present value. To solve this supply network design model, we apply a fix-and-optimize heuristic. Our numerical study demonstrates that the heuristic provides high-quality solutions in a reasonable time frame. We indicate that combining carbon tariffs with location-specific carbon policies fundamentally changes the economic and environmental consequences for the network design. In addition, we examine how carbon tariffs and location-specific carbon policies affect the choice of carbon-reducing production technologies.