Green credit financing versus trade credit financing in a supply chain with carbon emission limits

Abstract

Green credit financing (GCF) is a type of financial service provided by banks to encourage borrowers to commit green investment and achieve sustainable development. This study investigates a supply chain system consisting of a capital-constrained manufacturer and a well-funded supplier facing uncertain demand, in which the manufacturer may seek GCF from banks. An important prerequisite for obtaining a green loan is that the borrower must make green upgrades and ensure compliance with pre-specified environmental standards. We design a GCF model for a supply chain by imposing a hard constraint on carbon emissions. To determine the effectiveness of GCF, we conduct an in-depth analysis comparing the GCF with traditional trade credit financing (TCF), in which excessive carbon emissions are penalized. The optimal equilibrium solutions under GCF and TCF mode are obtained and their sensitivities to key parameters analyzed. Concerning the preferences of the two financing strategies, we find that under a relatively strict carbon emission policy, the manufacturer can set an appropriate green investment range to achieve a win-win situation with the supplier. Finally, we compare the social welfare of the supply chain for the different financing modes and find that there are regions in which both the social welfare and profit of the manufacturer can be a win-win. The government can guide manufacturers to make a win-win choice by setting different carbon caps.