The bright side of carbon emission permits on supply chain financing and performance

Abstract

Carbon emission constraints are usually treated as negative factors for enterprise operation, while this work finds that they could also be a source of profit if pledging the carbon emission permits becomes a part of the financial and operational decisions, which could significantly improve the supply chain performance and facilitate sustainability. Specifically, this paper considers an emission-dependent supply chain comprised of a supplier and a manufacturer who has limited capital and obtains the pledged loan by utilizing the carbon emission permits. By characterizing the participants’ optimal decision, some interesting observations can be achieved. The results show that the capital-constrained manufacturer makes more profit by pledging carbon emission permits to obtain a loan compared with having no access to borrowing money. The analysis reveals that the manufacturer may have several possible production regions based on the initial working capital and the pledged number of carbon emission permits. We also find that the production quantity is independent of the manufacturer's initial working capital and carbon emission permits in a no bankruptcy region, while the optimal production quantity decreases under the influence of carbon emission permits in a bankruptcy region. In addition, carbon emission abatement improves production quantity and enhances the manufacturer's profit. Moreover, we present some contracts that serve for coordinating the emission-dependent supply chain or realizing the Pareto improvement.