The newsvendor problem with GHG emissions from waste disposal under cap-and-trade regulation

Abstract

We study a newsvendor problem with greenhouse gas (GHG) emissions at the disposal stage regulated by a cap-and-trade policy. We first consider a synchronous version of the problem where the replenishment period and the emission assessment period are the same. For this problem, we propose simple algorithms to derive the optimal quantity and cost for both continuous and discrete demand distributions. We show that ignoring the carbon tax may lead to large overcost, especially when the GHG quota is small. For a normally distributed demand, we also show that the demand standard deviation has a non-linear and non-monotonic effect on the order quantity. We then investigate an asynchronous version of the problem where replenishment decisions occur at a higher frequency than the quota allocation. We formulate this lot sizing problem as a Markov decision process and solve it with a dynamic programming algorithm whose complexity is assessed. Through a numerical experimentation and theoretical results, we demonstrate how and when the flexibility of the optimal dynamic replenishment decisions allows to reduce costs. When approaching the end of the time horizon, the uncertainty reduction allows the decision maker to adopt a riskier policy and order larger quantities.