Computers & Industrial Engineering 139 (2020) 106207

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Computers & Industrial Engineering

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Inventory management in supply chains with consideration of Logistics, T

green investment and different carbon emissions policies
Yeu-Shiang Huanga, , Chih-Chiang Fangb, Ying-An Linc
⁎

a
Department of Industrial and Information Management, Center for Innovative FinTech Business Models, National Cheng Kung University, Taiwan, ROC
b
School of Computer Science and Software, Zhaoqing University, China
c
Department of Industrial and Information Management, National Cheng Kung University, Taiwan, ROC

ARTICLE INFO ABSTRACT

Keywords: This study investigates the effects that carbon policies and green technologies may have on the integrated in-
Carbon emissions ventory of a two-echelon supply chain with consideration of carbon emissions during the processes of product
Carbon taxation production, transportation, and storage. The three carbon emissions policies: limited total carbon emissions,
Carbon trading carbon taxation, and cap-and-trade, are considered in the study. The proposed model can assist firms in de-
Green technology
termining their corresponding optimal production quantity, delivery quantity, and green investment amount
Integrated Vendor-Buyer Inventory
with an aim of minimizing the costs under different carbon emissions policies. Moreover, this study also provides
practical implications for the government to make appropriate policies and regulations in balancing the trade-off
between environmental protection and economic growth. Finally, the results indicate that firms adopting the
carbon tax policy would prefer to invest in a relatively efficient green technology. With regard to the sources of
carbon emissions, the effects of unit carbon emissions during production and unit distance of transportation are
the most dramatic, and the cap limit has greater effects than the carbon emissions reduction factor of the green
technology. Besides, the government should set the limit of carbon emissions within a reasonable range under
the cap-and-trade policy to avoid suppliers overly trading their quotas of carbon emissions.

1. Introduction
Due to the fact that climate change and global warming become
more and more serious nowadays, many countries have made en-
vironmental policies and regulations to prevent companies (and man-
ufacturers) from excessively discharging waste water and air into the
environment. Accordingly, there are challenges to governments and
companies. To the governments, they need to validate and trace the
carbon emission of each energy consumers. Furthermore, the govern-
ments can also provide some mechanisms of carbon emission trading
and/or incentives of green investment for reducing carbon emission. To
the companies, they will pursue their best benefits under the regula-
tions, mechanisms, and incentives made from governments.
In general, there are three policies: limited carbon emissions, carbon
taxation, and cap & trade, which are often adopted by governments: (1)
Limited carbon emissions: Limited allowances of carbon emissions are
given to each company from the government, and the restriction does
not allow companies to produce excessive carbon emissions from their
production or business activities; (2) Carbon taxation: Carbon tax is a
form of pollution tax. The government sets a tariff on carbon per ton,
then translates it into a tax in terms of electricity, natural gas, or oil.
Since carbon tax prevents companies from using dirty energy, it en-
courages companies and organizations to reduce unnecessary con-
sumption and/or increase energy efficiency. Furthermore, carbon tax is
also able to enforce companies to use alternative or cleaner energy; (3)
Cap and trade: Companies will be taxed if they produce a higher level of
carbon emissions than their permitted allowances. However, companies
also can reduce their emissions and sell or trade the unused surplus to
other companies. For example, California emissions trading system,
launched in 2013, is one of a suite of major policies. It provides critical
experience in creating and managing an economy-wide cap-and-trade
system. Besides, companies may also choose to invest in green tech-
nology as it becomes cheaper than buying permits nowadays. These
three policies have been implemented in many developing and devel-
oped countries. However, pursuing the reduction of carbon emissions
regardless of economic growth is not practical for developing countries.
Instead, most developing countries would have to tradeoff between
environmental protection and economic growth.
Accordingly, the study focuses on the strategy of inventory man-
agement in a supply chain with consideration of the aforementioned

⁎
Corresponding author at: Department of Industrial and Information Management National Cheng Kung University, 1 University Rd., Tainan 701, Taiwan, ROC.
E-mail address: yshuang@mail.ncku.edu.tw (Y.-S. Huang).

https://doi.org/10.1016/j.cie.2019.106207
Received 8 March 2019; Received in revised form 24 September 2019; Accepted 27 November 2019
Available online 29 November 2019
0360-8352/ © 2019 Elsevier Ltd. All rights reserved.
Y.-S. Huang, et al.
three different carbon emission policies. In the past, most of the related
studies discussed this issue from the perspective from a single firm
which cannot achieve the overall optimization of the entire supply
chain. This study thus proposed an integrated approach from the per-
spectives of the both ends of a supplier chain with carbon emission
consideration which is the major difference from the related studies in
the literature.
The remainder of this study is organized as follows: Section 2 pre-
sents the literature review for the research issue. Section 3 describes the
research problem and assumptions in detail. Section 4 introduces the
process of model construction and investigates the effects that carbon
emissions have on the costs. Section 5 presents a numerical example
and perform a sensitivity analysis. Section 6 then gives the concluding
remarks and suggestions for future research.
2. Literature review
Enhanced levels of environmental awareness mean that the public is
now familiar with the ideas of saving energy and reducing carbon
emissions (Perera, Attalage, Perera, & Dassanayake, 2013; Grafton,
Kompas, Long, & To, 2014). Some countries have thus set regulations to
limit carbon emissions and reduce greenhouse gases, which may in-
directly impact the energy development and business operations of
companies (Gharaie, Zhang, Jobson, Smith, & Hassan Panjeshahi, 2013;
Toptal, Ozlu, & Konur, 2014). Firms thus have to pay more attention to
the reduction of carbon emissions during all stages of product life cy-
cles, from design to retirement (Agrawal & Ulku, 2011; Swami & Shah,
2013), and the effects of environmental issues on their cost structures
thus has to be considered when making business decisions.
With supply chain coordination, businesses no longer consider their
cost structures, such as inventory, sorely from their own perspectives
(suppliers or retailers), but focus instead on the cost structure of the
entire supply chain to form an integrated inventory model, which can
be utilized to develop appropriate strategies to enhance competitive
advantages (Ketzenberg & Ferguson, 2006; Chu & Leon, 2008; Hu,
Feng, & Chen, 2018; Lin, Su, & Peng, 2018; Fu & Ma, 2019;
Seyedhosseini, Hosseini-Motlagh, Johari, & Jazinaninejad, 2019). En-
vironmental awareness enables supply chains to investigate the effects
that carbon emissions policies and environmental taxation have on
their integrated cost structures. Due to the fact that firms must comply
the government regulations and should take the environmental re-
sponsibility under the global warming consideration, they have to seek
different ways in producing products to reduce the carbon emissions
which may occur at any time along a supply chain (Sugino & Arimura,
2011; Benjaafar, Li, & Daskin, 2013; Tsao, 2015; Wang & Qie, 2018;
Nidhi & Pillai, 2019). However, previous research rarely focused on
such an integrated inventory problem in which carbon emissions during
the processes of production, delivery, and storage are simultaneously
considered in a supply chain (Hoque, 2011; Glock, 2012; Jha &
Shanker, 2013; Kazemi, Abdul-Rashid, Ghazilla, Shekarian, & Zanoni,
2018). Moreover, instead of passively considering limited carbon
emissions and penalty cost due to excessive carbon emissions, some
firms may actively invest in green technology to reduce such emissions
(Wang, Ferguson, Hu, & Souza, 2013; Lukas & Welling, 2014). Since the
Kyoto Protocol (1997) called for 38 industrialized countries to reduce
their carbon emissions, these countries face the dilemma of environ-
mental protection or economic development. How to encourage the
industries to invest in green technologies is a critical issue for in-
dustrialized countries. However, the use of green technology would
incur companies’ substantial capital cost, and therefore the government
must provide incentive policies to the companies to reduce pollution by
increasing green investments. Namely, the companies can remedy their
green investment from the governments’ incentives, and then the
carbon emissions will be decreased through the green investment.
Based on the above discussions, this study considers the investment in
green technology and investigates the optimal strategy of inventory
2
Computers & Industrial Engineering 139 (2020) 106207
management in which reducing carbon emissions along the supply
chain is concerned to achieve the balance between the profit gains and
environmental protection.
Governments often set carbon emissions limits and regulations, such
as carbon taxes, trading, and offsets, for the sustainable development of
the environment. Carbon taxation has been adopted in a number of
industries, and Li (2014) stated that green research and development
activities can be undertaken to reduce both quality variations and the
amount of carbon tax paid. Krass, Nedorezov, and Ovchinnikov (2013)
suggested that firms should use different green technologies in response
to regulations and carbon taxation in order to reduce greenhouse gas
emissions and their negative effects on the environment. The im-
plementation of carbon trading policies encourages firms to reduce
emissions by reselling their surplus of emissions. Gong and Zhou (2013)
proposed a production planning model by assuming that the manu-
facturer can buy or sell such allowances at stochastic trading prices
within the production planning period, and keep the allowances under
the required limit of carbon emissions at the end of the planning period.
Gharaie et al. (2013) considered the carbon emissions reduction pro-
blem of a continuous production firm, in which carbon trading is per-
mitted, to obtain the optimal strategy of reducing emissions, and found
that this is indeed possible by carbon trading. Cap and trade can si-
multaneously reduce carbon emissions and increase additional profits.
Carmona and Hinz (2011) stated that limited carbon emissions and
carbon trading policies are the most effective mechanisms to reduce
greenhouse gases in Europe and the United States. Lukas and Welling
(2014) investigated the effects that economic and ecological efficiency
have on multi-stage supply chains, and found that the high fluctuation
in carbon trading prices would have positive effects on economic effi-
ciency but negative effects on ecological efficiency. Xu, Xu, and He
(2016) studied the joint decisions for pricing and production under cap-
and-trade and carbon tax regulations, and found that the optimal pro-
duction volume under cap-and-trade regulation (carbon tax regulation)
is highly sensitive is carbon-emission trading price and carbon tax rate.
García-Alvarado, Paquet, Chaabane, and Amodeo (2017) proposed in-
ventory control policies with remanufacturing under a cap-and-trade
scheme, and they considered that firms’ decisions are sensitive to
carbon prices and the inventory policy play an important role in com-
pliance with environmental legislation.
The effects of carbon emissions on specific industries and products
have been investigated in a number of works. Tsai, Yang, Chang, and
Lee (2014) investigated the cost management of green construction
with consideration of the carbon emissions cost and low carbon con-
struction methods. Cholette and Venkat (2009) stated that the logistics
of food and beverage industries are often intensive in the delivery stage,
resulting in high energy consumption and carbon emissions, and sug-
gested that the utilization of third party logistics providers can effec-
tively reduce the negative impacts on both cost and the environment.
Bozorgi, Pazour, and Nazzal (2014) stated that refrigeration and
transportation result in relatively great amount of greenhouse gases,
and with regard to the latter both transportation distance and load
weight are important factors. Jabali, Van Woensel, and de Kok (2012)
also stated that transportation contributes significant carbon emissions
in supply chains. Similarly, Demir, Bektas, and Laporte (2014) claimed
that freight transportation is the primary source of carbon emissions
among the various production activities, and also found that vehicle
speed and load weight are influential factors in fuel consumption and
carbon emissions. Soysal, Bloemhof-Ruwaard, and van der Vorst (2014)
stated that the food industry requires frequent transportation, and that
road structure, vehicle and fuel types, load weight, and transportation
distance would have great impacts on carbon emissions. Tang, Wang,
Yan, and Hao (2015) studied the issue of cutting carbon emissions by
reducing the frequency of transportation. Taskhiri, Garbs, and
Geldermann (2016) investigated that a logistics network for wood flow
by considering cascade utilization can effectively reduce carbon emis-
sions. Leenders, Velázquez-Martínez, and Fransoo (2017) studied the
Y.-S. Huang, et al.
allocation of carbon emissions in routing transportation issues. The
study indicated that the proposed simple allocation methods can lead to
a fair and carbon efficient allocation, and the allocation of carbon
emissions may not be influenced by shipment size estimation errors.
Tornese, Pazour, Thorn, Roy, and Carrano (2018) studied the issue of
carbon emissions and economic when making inventory and logistics
decisions in pallet supply chains. The study’s results indicated that
pallet loading conditions have the greatest effect on carbon equivalent
emissions and costs. Recently, the study of sustainable supply chain
arises due to the voice of environmental protection and social respon-
sibility. Sustainable supply chain management (SSCM) can assist firms
in systematically managing environmental and social issues in their
supply chains (Dubey, Gunasekaran, & Sushil, & Singh, T. , 2015; Hao,
Helo, & Shamsuzzoha, 2018; Rabbani, Hosseini-Mokhallesun,
Ordibazar, & Farrokhi-Asl, 2018; Rabbani, Foroozesh, Mousavi, &
Farrokhi-Asl, 2019; Awasthi & Omrani, 2019). The essence of SSCM
includes: environmental stewardship, conservation of resources, re-
duction of carbon emissions, financial viability, and social responsi-
bility etc. Accordingly, SSCM can not only reduce pollution and waste
but also enhance operation efficiency and competitive advantages. For
example, Sayyadik & Awashi (2018a, 2018b) considered a sustainable
transportation system by using simulation and ANP methods to save
energy and lower the pollution.
Research on suppliers’ or retailers’ inventory replenishment under
carbon emissions regulations has been carried out in a number of
works. For example, Validi, Bhattacharya, and Byrne (2014) proposed a
two-echelon supply chain model, in which a low-carbon distribution
system is considered for the supplier, to derive the optimal transpor-
tation route and minimal total cost with consideration of green con-
straints and carbon emissions reductions. Toptal et al. (2014) con-
sidered traditional economic ordering quantity (EOQ) models under
different carbon emissions regulations, such as limited carbon emis-
sions, carbon taxation, and carbon trading, by allowing the retailer to
invest in green technology during the processes of ordering, storage,
and purchasing. Bouchery, Ghaffari, Jemai, and Dallery (2012) in-
vestigated the effects that the variations in order quantity and different
monitoring policies have on carbon emissions, and found that the
adoption of monotonously linear carbon tax prices may not optimally
reduce carbon emissions. Konur and Schaefer (2014) investigated the
traditional EOQ model with less-than-truckload and truckload trans-
portation methods under different carbon regulations, and compared
the effectiveness of the corresponding carbon emissions reduction
methods and policies. Hincent and Bironneau (2015) proposed a
carbon-constrained EOQ model. The mechanisms of the model allow a
company to pursue its max profit when its carbon emissions are de-
termined. Shu et al. (2017) extended the traditional EOQ model for
remanufacturing activities with consideration of the constraint of
carbon emissions. They considered that a manufacturer’s decision will
be influenced by carbon emissions quota and its trade prices. Wang and
Ye (2018) studied the comparisons between EOQ and JIT systems in a
supply chain by adding carbon emissions into the total cost. According
to their study’s result, manufacturers and retailers should cooperate
each other to reduce related costs and carbon emissions from trans-
portation and inventory management. To sign contracts might be
helpful to promote the cooperation of the both sides. In recent years,
research on EOQ or lot-sizing models are extended to multi-product
considerations (Hoseini Shekarabi, Gharaei, & Karimi, 2018; Gharaei,
Hoseini Shekarabi, & Karimi, 2019; Gharaei, Karimi, & Hoseini
Shekarabi, 2019a; Gharaei, Karimi, & Hoseini Shekarabi, 2019b).
However, it is not easy to take carbon emissions and green constraints
into consideration for multi-product problems due to the complexity of
mathematical manipulations.
Coordination of supply chains benefits members by not only de-
creasing costs, thus enhancing competitiveness, but also by collabora-
tively reducing carbon emissions. Caro, Corbett, Tan, and Zuidwijk
(2013) suggested that close supply chain coordination can enhance
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Computers & Industrial Engineering 139 (2020) 106207
carbon emissions reduction effectiveness and supply chains should be
vertically integrated with consideration of both environmental out-
comes and overall profit. Jaber, Glock, and El Saadany (2013) in-
vestigated the effects that the carbon emissions policies of carbon
trading, limited carbon emissions, and carbon taxation have on the
inventory cost structures of a two-echelon supply chain under the
regulations imposed by the European Union Emissions Trading System.
Zanoni, Mazzoldi, and Jaber (2014) investigated the joint economic lot
size problem of a two-echelon supply chain, in which unit carbon
emissions are charged with an emissions tax and a penalty cost is set for
excessive carbon emissions to determine the optimal production
quantity, number of shipments, and production rate. Zhou, Bao, Chen,
and Xu (2016) suggested that a carbon-emission reduction cost sharing
contract can achieve the supply channel coordination and achieve a
win–win situation under certain conditions. Xu, He, Xu, and Zhang
(2017) studied sustainable supply chain coordination with considera-
tion of cap-and-trade mechanism and green investment. They con-
cluded that a manufacturer can cooperate with its retailer to reduce
carbon emissions without reducing the profits. Heydari, Govindan, and
Aslani (2018) proposed a Stackelberg game model to deal with the
pricing and greening decisions making for a dual-channel supply chain.
Heydari and Mosanna (2018) also proposed a Sackelberg game model
to investigate the coordination among the members of a sustainable
supply chain, and concluded that their model can not only increase the
supply chain members’ profit but also obtain more social concerns. Li,
Xiao, and Qiu (2018) studied that a two-echelon supply chain’s mem-
bers follow a revenue-sharing contact to refine the decisions of pricing
and carbon-emission reduction. In order to achieve a better perfor-
mance, the manufacturer needs to take the retailer's fairness concerns
into consideration when making decisions. Aslani and Heydari (2019)
proposed a transshipment contract for coordinating the supply chain
and also guaranteeing the members’ profitability. Wang and Song
(2019) investigated pricing strategies for a dual-channel supply chain
with green investment under uncertain demand. They utilized a
Stackelberg leader-follower game model and obtained the equilibrium
solutions. Hong and Guo (2019) considered that the cooperation be-
tween a manufacturer and a retailer in a supply chain may not always
benefit the both parties unless they have proper coordination contracts
which can achieve a win-win situation.
In order to compare the previous works with this study on the five
characteristics, Table 1 presents the comparative similarities and dif-
ferences.
As can be seen in Table 1, most of the studies did not take all the
important aspects into consideration. The major contribution of the
study to the literature is that the proposed integrated model deals with
the inventory management for the both sides of the supplier chain re-
garding the three carbon emissions policies and green investment. The
carbon emissions can be from the processes of production, delivery, and
storage and the investment in green technology is expected to reduce
such carbon emissions. Based on the above discussions, the objective of
this study is to minimizing the total related costs in the supply chain by
setting the optimal delivery quantity, number of deliveries, and amount
of green investment under the three different carbon emissions policies.
3. Green investment and carbon emissions reduction
This study investigates the integrated inventory with consideration
of carbon emissions, in which carbon emissions are assumed to be from
the processes of production, transportation, and storage. Suppose that
the carbon emissions from production setup and producing a product
are ES and EP , respectively. Since delivery distance and lot size have
significant impacts on carbon emissions, we assume that the carbon
emissions are ET for delivering a unit product for a unit distance during
the transportation process. With regard to transportation, since the
delivery distance between the supplier and retailer is often fixed, the
number of shipments and transportation lot size would have significant
Y.-S. Huang, et al. Computers & Industrial Engineering 139 (2020) 106207

Table 1
The literature review of the reducing carbon emissions issues.
Characteristic of Studies

Studies Limited Carbon Emission Carbon Tax Cap and Trade Green Investment Integration or Coordination of Supply Chain

The Study*
Hoque (2011)
Sugino and Arimura (2011)
Carmona and Hinz (2011)
Glock (2012)
Bouchery et al. (2012)
Jha and Shanker (2013)
Wang et al. (2013)
Benjaafar et al. (2013)
Krass et al. (2013)
Gong and Zhou (2013)
Gharaie et al. (2013)
Caro et al. (2013)
Jaber et al. (2013)
Lukas and Welling (2014)
Li (2014)
Validi et al. (2014)
Toptal et al. (2014)
Konur and Schaefer (2014)
Zanoni et al. (2014)
Tsao (2015)
Hincent and Bironneau (2015)
Xu et al. (2016)
Zhou et al. (2016)
García-Alvarado et al. (2017)
Xu et al. (2017)
Shu et al. (2017)
Heydari et al. (2018)
Heydari and Mosanna (2018)
Kazemi et al. (2018)
Wang and Qie (2018)
Wang and Ye (2018)
Li et al. (2018)
Nidhi and Pillai (2019)
Aslani and Heydari (2019)
Hong and Guo (2019)
Wang and Song (2019)
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impacts on carbon emissions. Moreover, the storage of some special
products, such as frozen food, may cause large amounts of carbon
emissions. We thus assume that the carbon emissions from the storage
process are Eh . Both the supplier and retailer have to comply with the
regulations of limited carbon emissions and environmental tax. We
consider three scenarios with the different carbon emissions policies:
(1) Carbon taxation: The government levies taxes for each unit carbon
emissions from the processes of production, transportation, and storage.
The carbon tax for each unit carbon emissions is C1. The carbon tax may
be different for different industries. For example, the energy develop-
ment industry may be charged a low or no carbon tax in certain
countries. (2) Cap and trade: According to US or Europe’s system, the
government may provide initial allowances of carbon emissions to the
applicants of industrials in a specific period, and therefore the firms can
trade its unused allowance to others before it expires. In order words,
the unused allowance is valid only at the current period regardless of
selling or purchasing. Suppose that the total amount of carbon emis-
sions from the activities performed by the supplier and retailer is lim-
ited as U, and the surplus X if U has not been reached can be sold at C2
per unit. In contrast, if the carbon emissions exceed U, the firm has to
purchase allowances from others in the market or invest in green
technologies to comply with the regulations. The carbon trading price,
C2 , is the average price in the market, and the carbon emissions al-
lowances available in the market are sufficient for purchases to be
made. (3) Limited carbon emissions: The sum of carbon emissions from
the processes of production, transportation, and storage for the supplier
and retailer cannot exceed the limited amount of carbon emissions, U,
which may vary for dissimilar industries in different countries.
Suppose that the investment in a green technology, G, is considered,
which can reduce carbon emissions to comply with the carbon emis-
sions regulations, decrease the carbon trading cost, and subsidize the
cost of selling carbon emissions allowances. We investigate the in-
tegrated inventory model with consideration of policies of limited
carbon emissions, carbon taxation, and cap and trade to derive the
optimal number of shipments, n , transportation lot size, Q , and
amount of green investment, G , with the aim of minimizing the total
cost which includes the both sides’ setup costs, storage costs, trans-
portation cost, carbon tax, carbon trading revenue and green tech-
nology investment. The results obtained in the different scenarios
would provide managerial insights to help in decision making. The
assumptions of this study are as follows:
(1) This study considers a centralized supply chain, in which a single
supplier offers a single product to a retailer, and the product de-
mand is not affected by seasonal factors.
(2) The production rate is constant and greater than the demand rate of
the retailer. Product shortages are not considered. Firms will hold
the current production scale and not to enlarge it in the planning
period.
(3) The capacities of storage and transportation can be handled for the
both parties, and extreme cases are assumed not to occur.
(4) The influences of different types of trucks and shipment’s weight on
Carbon-emission are not considered in the model. Average method
is used for the estimation of the carbon-emission from different
types of trucks and shipment’s weight.
(5) Carbon emissions occur in the processes of production,

4
Y.-S. Huang, et al. Computers & Industrial Engineering 139 (2020) 106207

transportation, and storage, and carbon emissions from other pro- subtracting the production time from the production cycle.
cesses are not considered.
(6) The green investment cannot completely reduce carbon emissions,
and its effect can be measured and defined as a quadratic function 4.1. The basic model without carbon emissions
from related historical data.
The supplier’s costs consist of the costs of production setup, trans-
The notations used in this study are as follows: portation, and inventory holding. By dividing the demand rate, D, by
the transportation lot size, Q, and the number of shipments, n, and then
multiplying with the production setup cost of each production cycle,
D The demand rate for the retailer the supplier’s yearly production setup cost can be obtained as nQ AV . By
D
P The production rate for the supplier and P > D
dividing the demand rate, D, by the transportation lot size, Q, and then
Q The transportation lot size
AV The production setup cost for the supplier multiplying with the transportation distance of each time, d, and unit
AB The order processing cost for the retailer transportation cost, F, the supplier’s yearly transportation cost can be
obtained as Q Fd . In addition, Fig. 2 shows the accumulated inventory of
hV The storage cost for the supplier D

hB The storage cost for the retailer

the supplier. As can be seen in Fig. 3, suppose that the supplier’s in-
n The number of shipments within the production cycle
F The unit transportation cost ventory zone is V. By subtracting the triangular area, which is zone A,
d The delivery distance and the ladder area, which is zone B, from the rectangular area, the
Eh The carbon emissions from storing a unit product supplier’s inventory, V, can be obtained. By dividing the obtained
ET The carbon emissions from delivering a unit product supplier’s inventory area by the production cycle, nQ D , and then
EP The carbon emissions from producing a unit product
multiplying with the supplier’s inventory holding cost per unit, hV , the
ES The carbon emissions from production setup
G The green investment amount supplier’s yearly inventory holding cost can be derived as
α
β
The
The
efficiency factor of carbon emissions reduction
offset factor of carbon emissions reduction
( +
Q
2
nQ (P
2P
D)
)
hV . The total cost for the supplier is the sum of the yearly
production setup cost, transportation cost, and inventory holding cost,
U The upper limit of carbon emissions
C1 The
The
carbon tax of unit carbon emission
carbon trading price of unit carbon emission
which is thus given by
D
A
nQ V
+
D
Q
Fd +
Q
2 (1 + n (1 ) ) h .
D
P V
C2
On the other hand, the retailer’s cost consists of the costs of order
X The carbon emissions allowance
processing and inventory holding. By dividing the demand rate, D, by
the transportation lot size, Q, and then multiplying with the order
4. The integrated inventory model with carbon emissions processing cost of each time, AB , the retailer’s yearly order processing
cost can be obtained as Q AB . By dividing the retailer’s total inventory of
D

Fig. 1 shows the inventory levels of the supplier and retailer, re- the production cycle by the cycle time and then multiplying with the
spectively. The demand rate for the retailer is D, and the production inventory holding cost per unit, the retailer’s yearly inventory holding
cost can be obtained as 2 hB . The total cost for the retailers is the sum of
Q
rate for the supplier is P, which has to be greater than D. The supplier
delivers Q units to the retailer for every delivery cycle, and the delivery the yearly order processing cost and inventory holding cost, which is
thus given by Q AB + 2 hB .
D Q
cycle time is thus denoted as Q D . The supplier continuously produces
products after delivering products to the retailer until the pre- Therefore, the sum of the total costs for the supplier and retailer,
determined production quantity has been reached. The supplier de- i.e., the supply chain, is given by
livers Q units for n times to the retailer within the production cycle, and
the production cycle time is calculated as nQ/D. The cycle ends when TC0 (n, Q) =
D (AV + nAB ) D
+ Fd +
Q
1+n 1
D
hV + hB .
the supplier’s inventory has run out. Since the production time is nQ/P, nQ Q 2 P
the consumption period is thus nQ ( 1
D
1
P ), which is obtained by (1)

Fig. 1. The Inventory Levels for the Supplier and Retailer.

5
Y.-S. Huang, et al. Computers & Industrial Engineering 139 (2020) 106207

Fig. 2. The Supplier’s Accumulated Inventory.

Therefore, the carbon emissions from the production process each year
are given by DEP + nQ ES . Soysal et al. (2014) stated that delivery dis-
D

tance and transportation lot size would have significant impacts on

carbon emissions during the transportation process. By multiplying
carbon emissions from a unit distance, ES , with the demand rate, D,
dividing by the transportation lot size, Q, and then multiplying with the
delivery distance, d, the yearly carbon emissions from the transporta-
tion process can be obtained as Q ET d . Carbon emissions may also occur
D

from storing undelivered or unsold products due to product char-

acteristics or other factors. By multiply the carbon emissions from
storing a unit product, Eh , with the sum of the average inventory from
both the supplier and retailer, the yearly carbon emissions from product
storage are
Q
2 ( 2 + n (1 ) ) E .
D
P h
When the amount of carbon emissions in the supply chain exceeds
Fig. 3. Cost Advantage Zones for Different Carbon Emissions Policies. the limited amount of the regulations, instead of incurring the penalty
cost, we consider that a green technology can be invested in to reduce
Lemma 1. The total cost of the basic integrated inventory model, the emissions, and the carbon reduction function for the green tech-
TC0 (n, Q) , is convex with a minimum value, and the optimal nology is given by R (G ) = G G 2 , where denotes the carbon re-
transportation lot size is given by duction efficiency factor and denotes the offsetting carbon reduction
factor (Huang & Rust, 2011; Toptal et al., 2014). This indicates that as
2D (n (Fd + AB ) + AV ) the supply chain invests the green cost, G, in the green technology, G
Q0 (n ) = ,
(
n hB + hV 1 + n 1 ( ( D
P ))) (2)
of carbon emissions reduction can be obtained. However, since the use
of the green technology may also cause energy consumption,
G 2 denotes such additional carbon emissions. Note that and can be
and the optimal number of shipments is a positive integer, which satisfies
obtained by fitting the historical data of carbon emissions reduction and
the following inequality
the amount of green investment.
n0 (n 0 1)
AV (hB + hV )
n 0 (n0 + 1) In considering the carbon emissions from the processes of produc-
( 1
D
P ) (A
B + Fd ) hV (3)
tion, transportation, and storage as well as the investment in the green
technology, the total inventory cost and amount of carbon emissions are
Proof. Please see the Appendix A. □ given by

D (AV + nAB ) D Q D
4.2. Carbon emissions policies and investments in green technology TC (n, Q, G ) = + Fd + 1+n 1 hV + hB + G,
nQ Q 2 P

Suppose that the production rate in the production process, P, is (4)

constant, and the carbon emissions from producing a unit product is EP . and
The supplier has to setup production equipment at the beginning of
each production cycle, which would result in carbon emissions, ES .

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Y.-S. Huang, et al. Computers & Industrial Engineering 139 (2020) 106207

E (n, Q, G ) = DEP +
D
(ES + nET d ) +
Q
2+n 1
D
Eh G + G 2,
carbon tax. As a result, the investment in the green technology to re-
nQ 2 P duce carbon emissions is feasible for the scenario of carbon taxation.
(5)
respectively. 4.2.2. Cap and trade
The cap and trade policy regulates the total amount of carbon
4.2.1. Carbon taxation emissions from the supplier and retailer. If carbon emissions do not
In the scenario of carbon taxation, the carbon tax is C1 for unit exceed the upper limit, U, the surplus X can be sold at C2 per unit to
carbon emissions, which would increase linearly along with the amount offset the expected costs. In contrast, if carbon emissions exceed U, the
of carbon emissions. Both the supplier and retailer can invest in green firm has to purchase allowances from others or invest in green cost to
technologies to reduce carbon emissions, and thus reduce the cost of comply with the regulations of limited carbon emissions. Suppose that
paying the carbon tax. The costs of the integrated inventory model the surplus is valid only at the current period regardless of selling or
consist of the supplier’s production setup cost, the retailer’s order purchasing, and the carbon trading price, C2 , is the average price in the
processing cost, product transportation cost, the supplier’s and retailer’s market. We also assume that the carbon emissions allowances are suf-
inventory holding costs, the total cost of paying the carbon tax, and the ficient in the market for purchasing. In considering the scenario of the
expenditure of the green investment. By summing up the amount of cap and trade, the total cost consists of the supplier’s production cost,
carbon emissions from the production activities, supplier’s production retailer’s order processing cost, product transportation cost, both par-
setup, product transportation, and inventory holding of the both parties ties’ inventory holding cost, carbon trading cost, and the amount of
and then subtracting the carbon emissions reduction effectiveness from investment in green technologies. By subtracting the sum of carbon
the green cost, the total amount of carbon emissions can be obtained. emissions from the production activity, product transportation, and
Therefore, total cost for carbon taxation is given by inventory holding of the both parties from the upper limit of carbon
emissions, and then subtracting the carbon emissions reduction effec-
D (AV + nAB + C1 Es ) D
TC1 (n , Q, G ) = nQ
+ Q
d (C1 ET + F) tiveness from the investment in green technologies, the surplus can be
obtained. The total integrated cost under the scenario of cap and trade
+
Q
2 ( (1 + n ( 1 ) ) h
D
P V (
+ hB + 2 + n 1 ( D
P ))C E )
1 h is given by
+ C1 DEP C1 ( G G 2) +G (6) TC2 (n , Q, G ) =
D (AV + nAB + C2 Es )
+
D
d (F + C2 ET )
nQ Q

Lemma 2. The total cost of the integrated inventory model, TC1 (n, Q, G ) ,
for the scenario of carbon taxation is convex with a minimum value, and the
+
Q
2 ( (1 + n ( 1 ) ) h D
P V (
+ hB + 2 + n 1 ( D
P ))C E )
2 h

optimal transportation lot size is given by C2 U + C2 DEP C2 ( G G 2) +G (10)

2D (n (d (F + C1 ET ) + AB ) + AV + C1 ES ) Lemma 3. The total cost of the integrated inventory model, TC2 (n, Q, G ) ,
Q1 (n ) = ,
( (
n C1 2 + n 1 ( D
P )) (
Eh + hB + hV 1 + n 1 ( D
P ))) for the scenario of cap and trade is convex with a minimum value, and the
optimal transportation lot size is given by
(7)
2D (n (d (F + C2 ET ) + AB ) + AV + C2 ES )
the optimal number of shipments is a positive integer, which satisfies the Q2 (n ) =
following inequality ( (
n C2 2 + n (1
D
P
) )Eh + hB + hV 1 + n (1 ( D
P
) ))
(AV + C1 ES )(2C1 Eh + hB + hV ) (11)
n 1 (n 1 1) n1 (n1 + 1),
(1
D
P ) (AB + d (F + C1 ET ))(C1 Eh + hV ) the optimal number of shipments is a positive integer that satisfies the
following inequality
(8)
and the optimal amount of green investment is given by (AV + C2 ES )(2C2 Eh + hB + hV )
n 2 (n 2 1) n 2 (n2 + 1)

G1 =
C1 1
.
( 1
D
P ) (A B + d (F + C2 ET ))(C2 Eh + hV )
2 C1 (9) (12)
Proof. Please see the Appendix A. □ and the optimal amount of green investment is given by

Upon obtaining the optimal solution for the scenario of carbon G2 =

C2 1
taxation, we further investigate the effects that the carbon emissions 2 C2 (13)
reduction effectiveness and carbon tax price have on the total inventory
Proof. Please see the Appendix A. □
cost and amount of carbon emissions, and compare the differences
before and after the green investment. The effectiveness of the invest- We further investigate the effects of that the carbon emissions re-
ment in the carbon emissions reduction in the supply chain is discussed duction effectiveness and average trading price have on the total in-
in Proposition 1. ventory cost and amount of carbon emissions, and compare the differ-
ences before and after the green investment in carbon emissions
Proposition 1. For the scenario of carbon taxation, the investment in the
2 reduction. The effects of the investment in the carbon emissions re-
green technology can cut down the total cost by ( C1 1) , and reduce the
4C1 duction in the supply chain are discussed in Proposition 2.
2C 2 1
amount of carbon emissions by 1
. Proposition 2. For the scenario of cap and trade, the investment in the
4C12
2
Proof. Please see the Appendix A. □ green technology can cut down the total cost by ( C2 1) , and reduce the
4C2
2C 2 1
From Proposition 1, for a fixed carbon emissions reduction factor, , amount of carbon emissions by 2
.
4C22
and offsetting carbon reduction factor, , i.e., green technologies with
Proof. Please see the Appendix A. □
the same effectiveness, when the carbon tax price, C1, increases, whe-
ther to invest in green technologies or not would have a significant From Proposition 2, for a fixed carbon reduction factor of green
effect on carbon emissions reduction, which indicates that investing in technologies, , and the offsetting carbon emissions reduction factor, ,
carbon emissions reduction would be more beneficial than paying the when the carbon market trading price, C2 , increases, the total cost and

7
Y.-S. Huang, et al. Computers & Industrial Engineering 139 (2020) 106207

carbon emissions would be more significantly affected. For a greater U, Minimize TC3 (n, Q, G, ) =
D (AV + nAB )
+
D
Fd
nQ Q
the investment in carbon emissions reduction could result in more
trading subsidies. From the firm’s perspective, the investment in carbon
emissions reduction can not only comply with the government regula-
+
Q
2 ( (1 + n (1 ) ) h D
P V + hB )
tions but also gain trading subsidies. Moreover, the subsidy offset in-
creases as the trading price increases. Even for a smaller U, the in-
+G + DEP +
D
nQ
(ES + nES d) +
Q
2 ( 2 + n (1 ) ) E D
P h

vestment in carbon emissions reduction can decrease the purchasing G + G 2 U ). (16)

allowances. As a result, the investment in carbon emissions reduction is
a beneficial strategy for the scenario of the cap and trade policy.
Lemma 4. In considering the scenario of the limited carbon emissions, the
Moreover, the upper limit of carbon emissions, U, would have sig-
total cost of the integrated inventory model, TC3 (n, Q, G, ) , has a
nificant impacts on the carbon emissions amount and cost. When the
minimum, and the optimal transportation lot size is given by
firm invests in green technologies to reduce carbon emissions, if its
amount of carbon emissions exceeds the upper limit, i.e., 2D (n (AB + Fd ) + AV + (dnET + ES ))
DEP +
D
E
nQ s
+
D
E d
Q T
+
Q
2 (2 + n (1 ) ) E
D
P h G + G 2 > U , the firm Q3 (n , ) =
( (
n hV 1 + n 1 ( D
)) + h B + (2 + n (1 ) ) E ) D
h
,

does not have any allowance to sell and gain carbon trading offset, and P P

X 0 . The firm thus has to purchase allowances from the carbon (17)
trading market. When the trading price of allowances is relatively high,
selling unused allowances may offset more cost. The maximum carbon the optimal number of shipments is a positive integer that satisfies following
2
emissions reduction effectiveness is . Firms with high productivity inequality
4
and carbon emissions, which invest a large amount in reducing such (AV + ES )(hB + 2eh + hV )
emissions, may sometimes not be able to have sufficient allowances to n 3 (n 3 1) n3 (n3 + 1),
offset the carbon cost, and thus see negative effects from investing in (1 D
P )( E h + hV )(AB + d (F + ET ))

green technology. (18)

Proposition 3. For the scenario of cap and trade, there should be an upper
bound U* for the limit of carbon emissions.
Proof. Please see the Appendix A. □
From Proposition 3, if the government sets a higher limit of carbon
emissions, the firm may gain more carbon subsidies from trading with
other firms, and thus the total cost may be less than zero, i.e.,
TC2 (n, Q, G ) < 0 . However, in practice, selling carbon emission surplus
to completely offset the cost or even earn profit should not be possible.
Therefore, the government has to determine the limit of carbon emis-
sions within a reasonable range.
4.2.3. Limited carbon emissions
In considering the scenario of limited carbon emissions, the supplier
and retailer have to adjust their business operations to comply with the
limited carbon emissions U. In case of excessive carbon emissions, both
parties can invest in green technologies to reduce these. The total cost
consists of the supplier’s production cost, retailer’s order processing
cost, product transportation cost, both parties’ inventory holding cost,
and amount of investment in green technologies. By summing up the
amount of carbon emissions from the production activities, product
transportation, and inventory holding of the both parties and then
subtracting the carbon emissions reduction effectiveness from the green
cost, the total amount of carbon emissions can be obtained, and this
should be equal to the upper limit of carbon emissions due to the
maximization of the green investment. The programming model for the
scenario of limited carbon emissions is given by
Minimize TC3 (n, Q, G )
D (AV + nAB ) D Q D
= + Fd + 1+n 1 hV + hB + G
nQ Q 2 P Parameter settings.
and the optimal amount of green investment is given by
1
G( ) =
2 (19)
Proof. Please see the Appendix A. □
5. Numerical applications
This study presents a numerical example to investigate the effects
that the different carbon emissions policies have on the total inventory
cost in the supply chain and the feasibility of investing in green tech-
nologies. Suppose that a medical instrument supplier cooperate with a
local retailer to produce and sell a kind of medical product. They esti-
mated the demand for a product is 8000 units within a supply chain.
The supplier’s production rate is 10,000 units per year, and the pro-
duction setup cost is $1200 for every production cycle. The supplier’s
inventory holding cost is $50 per unit. The distance between the sup-
plier and the retailer is about 200 km, and the transportation cost is $10
per km. The order processing cost is $100 each time, and the inventory
holding cost is $60 per unit for the retailer. The supplier’s production
setup would result in 10 units of carbon emissions. Producing a product
would result in 2 units of carbon emissions. Delivering products from
the supplier to the retailer would result in 5 units of carbon emissions
per kilometer. Storing a product yearly would result in 4 units of carbon
emissions. The carbon reduction efficiency factor is 15, and the off-
setting carbon reduction factor is 0.01 for the investment in a green
technology. The parameter settings are summarized in Table 2.
Table 2

(14) Parameter Value Parameter Value

D 8000 ET 5
D Q D P 10,000 2
Subject to DEP + (ES + nES d) + 2+n 1 Eh G+ EP
nQ 2 P Av $1200 ES 10
(15) AB $100 α 15
G2 = U .
hV $50 β 0.01
We use the Lagrange multiplier method to derive the minimum hB $60 C1 $1.2
F $10 C2 $1.8
value of the total cost and the corresponding optimal transportation lot
d 200 U2 6000
size, number of shipments, and investment amount as the decision Eh 4 U3 1,2000
variables. The programming model is rewritten as

8
Y.-S. Huang, et al. Computers & Industrial Engineering 139 (2020) 106207

5.1. Comparison of carbon emissions reductions profitable to the supplier under the threshold.
Proposition 5. There exist a threshold U2*, if U2 < U2*, then operating
Firms confront different carbon emissions regulations in different
under the cap and trade policy would be more profitable than under the
areas, and the effects that different regulations have on the cost struc-
carbon tax policy.
tures thus need to be considered. In particular, investment in green
technology to reduce carbon emissions may reduce the total cost. This Proof. Please see the Appendix A. □
study compares the feasibility of investing in green technology to re-
Proposition 5 indicates that managers should choose to operate
duce carbon emissions for the three scenarios of the carbon taxation,
under the cap and trade policy based on the government determined U2 .
cap and trade, and limited carbon emissions in terms of different and
However, operating under the cap and trade policy may be not always
. The following propositions and figures are deduced for decision
better than under the carbon tax policy for a small U2 if the carbon tax is
makers to evaluate different carbon emissions policies. Based on the
unequal to the carbon trading price under a low level of U2 made by the
settings of Table 2, Fig. 3 shows the iso-curves for separating different
government.
advantage decision zones in terms of carbon emissions reduction factor,
Moreover, if the carbon tax is equal to the carbon trading price
, and the offsetting carbon emissions factor, .
under the same effective green technology, the cap and trade policy is
As can be seen in Fig. 3, managers can choose an appropriate carbon
also advantage to the supply chain as long as the difference between the
emissions policy based on the realization of the two carbon emissions
supplier’s cost and the retailer’s cost is smaller than the product of C2
reduction factors of the green technology. Proposition 4 provides the
and U2 . Propositions 6 provides the theoretical proof for this.
useful direction for managers when they face different scenarios which
concerning the effect of the green technology investment. Proposition 6. When the carbon tax, C1, is equal to the carbon trading
price, C2 , for the same effective green technology, operating under the cap
Proposition 4. (1) For a larger carbon emissions reduction factor, , which
and trade policy would be more profitable than under the carbon tax policy.
indicates that the green technology in carbon emissions reduction is fairly
The difference in the total inventory costs is C2 U2 , but there is no difference
effective, operating under the limited carbon emissions policy would be more
in the total amount of carbon emissions.
profitable. (2) For a larger offsetting carbon emissions reduction factor, ,
which indicates that the green technology in carbon emissions reduction is Proof. Please see the Appendix A. □
ineffective, operating under the carbon tax policy would be more profitable.
Proposition 6 indicates that if the carbon tax is equal to the carbon
(3) For moderate and , operating under the cap and trade policy would
trading price, the firm would choose to operate under the cap and trade
be more profitable.
policy involving incentives rather than under the carbon tax policy
The aforementioned analysis indicates that for a high carbon involving penalties. Moreover, for a greater limit of carbon emissions
emissions reduction factor, the inventory cost under the limited carbon for the cap and trade policy, firms would be more willing to operate
emissions policy would be less than that under either the carbon tax under the cap and trade policy. However, their willingness to reduce
policy or the cap and trade policy. It also implies that the green tech- carbon emissions would decrease. In other words, if the government
nology is worthy to invest since it represents an incremental trend by wants to increase the willingness to reduce carbon emissions from in-
enlarging the green investment scale to carbon emissions reduction. dustries, it is not suggested to raise the limit of carbon emissions. As a
However, for a high offsetting carbon emissions reduction factor, the result, the regulation of carbon taxation involving a penalty would be
inventory costs under the limited carbon emissions and cap and trade more feasible to achieve the predetermined government goal of lower
policies would gradually converge, and operating under the cap and carbon emissions. According to the above mentioned, to lower the limit
trade policy would be beneficial. In other words, the supplier should of carbon emissions and to raise the carbon tax moderately at the same
evaluate that it is worthwhile to increase the green investment or not time can force industries to reduce carbon emissions but it must be
because the benefit of carbon emissions reduction may not cover the carefully handled by the government to mitigate the negative effects by
benefits of trading carbon emissions allowance and the increment of this strategy. Accordingly, the determination of regulations for an ap-
green investment. In considering the low carbon emissions reduction propriate carbon emissions policy balances economic growth and en-
effectiveness, for a relatively high offsetting carbon emissions factor, vironmental preservation, which is a government important issue.
operating under the carbon tax policy would be beneficial. However, as In order to realize the advantage decision zones in terms of the
the carbon emissions reduction effectiveness increases, the inventory carbon tax and the limit of carbon emissions, a comparison between the
costs under the carbon tax and cap and trade policies would gradually carbon tax and limited carbon emissions policies is also made, and the
converge and, as a result, operating under the carbon tax policy would important key for these are the carbon tax, C1, and the limit of carbon
be beneficial. In summary, when a green technology is effective, the emissions, U3 , respectively. Fig. 4 illustrates the iso-curve to separate the
firm should choose to operate under the limited carbon emissions two advantage zones for operating under the carbon taxation and
policy; when a green technology is ineffective, the firm should choose
to operate under the carbon tax policy; when a green technology is
moderately effective, the firm should choose to operate under the cap
and trade policy. Besides, the above information also can provide
governments useful indications to make appropriate environmental
policies for industries. Accordingly, if governments want to push their
environmental policies successfully, they need to consider which policy
can bring the firms more interests to induce more green investments.
Moreover, comparative analyses among the three policies in terms
of their corresponding important parameters are performed. Firstly, the
comparison between the carbon tax and cap and trade policies will be
made to understand the trade-off effect between the carbon tax and the
limit of carbon emissions. The key parameter for the carbon tax policy
is the carbon tax, C1, and the important parameters for the cap and
trade policy are the carbon trading price, C2 , and limit of carbon
emissions, U2 . Propositions 5 provides the theoretical proof regarding
the threshold of U2 , and the cap and trade policy would be more Fig. 4. Cost Advantage Zones in Terms of C1 and U3.

9
Y.-S. Huang, et al.
Fig. 5. Cost Advantage Zones in Terms of U2 and U3.
limited carbon emission policies. Proposition 7 provides the useful in-
dications for managers to choose the advantage policy in terms of the
carbon taxation and the limit of carbon emission.
Proposition 7. (1) For a low carbon tax, C1, and a low limit of carbon
emissions, U3 , the firm should choose to operate under the carbon tax policy.
(2) For a high carbon tax, C1, and a high limit of carbon emissions, U3 , the
firm should choose to operate under the limited carbon emissions policy.
Finally, suppose that the carbon trading price, C2 , remains un-
changed, we compare the advantages and disadvantages with con-
sideration of the variations in the limit of carbon emissions for the
scenarios of cap and trade and limited carbon emissions. Fig. 5 presents
the iso-curve for operating under the two policies. The useful indica-
tions for managers are arranged as Proposition 8, and the firms can
choose the advantage policy in terms of the two limits of carbon
emissions.
Proposition 8. (1) For a high limit of carbon emissions of the cap and trade
policy, U2 , and a low limit of carbon emissions of the limited carbon
emissions policy, U3, the firm should choose to operate under the cap and
trade policy. (2) For a high limit of carbon emissions of the limited carbon
emissions policy, U3 , and a low limit of carbon emissions of the cap and trade
policy, U2 , the firm should choose to operate under the limited carbon
emissions policy. (3) When the limits of both cap and trade and limited
carbon emissions policies are the same, i.e., U2 = U3 , the firm should choose
to operate under the cap and trade policy.
5.2. Sensitivity analysis
This study performs the sensitivity analysis for the scenario of the
limited carbon emissions policy. The related parameters are classified
to investigate their effects on the total inventory cost and total amount
of carbon emissions. Suppose that the limit of carbon emissions is
U3 = 2000 .
Fig. 6 shows the relationship between the related costs and the total
inventory cost.
As can be seen in Fig. 6, all the related costs are positively correlated
with the inventory cost. The supplier’s transportation unit cost, F , and
inventory holding cost, hV , are the most influential on the total in-
ventory cost. The transportation cost is always sensitive to the distance
between the supplier and the retailer, and carbon emissions will be also
produced from this active. Besides, when the production setup cost is
relatively high and inventory holding cost is relatively low, the supplier
will negotiate with its retailer to extend the production cycle time as
long as the retailer has no problem with warehouse capacity and safety
stock. As can be seen in Fig. 6, the increase rate of the supplier’s holding
cost is higher than the production setup cost, and it implies that to
extend the production cycle time is disadvantage to the supplier.
Fig. 7 shows the effects that the related carbon emissions
10
Computers & Industrial Engineering 139 (2020) 106207
Fig. 6. The Relationship between the Related Costs and the Total Inventory
Cost.
Fig. 7. The Effects of the Related Carbon Emissions Parameters.
parameters have on the total inventory cost.
As can be seen in Fig. 7, all the related carbon emissions parameters
are positively correlated with the total inventory cost. The effects of the
carbon emissions from producing a unit product, EP , and carbon
emissions from delivering a unit product, ET , are more influential on
the total inventory cost, especially the carbon emissions from producing
a unit product, EP , since the decreasing number of shipments would
result in a large fluctuation in the total inventory cost. In considering a
certain product demand rate, when the amount of carbon emissions
from producing a product increases, the total amount of carbon emis-
sions from the various processes in the supply chain would be more
likely to exceed the required limit of carbon emissions. The firm thus
has to invest more in green technologies to comply with regulations.
Since transportation costs were lower in the past, frequent deliveries
could reduce the inventory holding cost, which may not be applicable
nowadays, due to consideration of carbon emissions during the trans-
portation process. Moreover, there are a wider variety of transportation
options and vehicles, and firms should thus pay more attention to the
carbon emissions associated with different choices of transportation.
Fig. 8 shows the effects that , , and U, have on the total inventory
cost.
As can be seen in Fig. 8, the carbon emissions reduction factor, ,
and limit of carbon emissions, U, are negatively correlated with the
total inventory cost, but the offsetting carbon emissions reduction
factor, , is positively correlated with the total inventory cost. More-
over, the limit of carbon emissions, U, has the greatest impact on the
total inventory cost when varying between −30% and 10%. This can be
explained by the fact that the number of shipments and amount of in-
vestment within the variation vary a lot, and this may result in a large
fluctuation in the total inventory cost. For a lower limit of carbon,
managers can only invest in green technologies to reduce carbon
emissions to comply with regulations, which would result in a high total
Y.-S. Huang, et al.
Fig. 8. The Effects of α, β, and U.
Fig. 9. The Effects of P, D, and d.
inventory cost. As the limit of carbon emissions gradually increases, the
total inventory cost falls. When the limit of carbon emissions varies
between 20% and 30%, the supply chain would not be constrained by
the limit of carbon emissions, and the total inventory cost can be
maintained at a certain level. The decreasing carbon emissions factor,
, does not have significant effects on the total inventory cost and
amount of carbon emissions compared with the carbon emissions re-
duction factors, , and limit of carbon emissions, U.
Finally, Fig. 9 shows the effects that the production rate, P, demand
rate, D, transportation distance, d, have on the total inventory cost.
As can be seen in Fig. 9, the production rate, demand rate, and
transportation distance are all positively correlated with the total in-
ventory cost. Among these, the variations in the supplier’s production
rate and retailers’ demand rate would have more impact on the total
inventory cost. As the production rate increases, the supplier’s in-
ventory cost would increase. However, the effects on the total inventory
cost would marginally decrease as the production rate increases.
Moreover, as the demand rate increases, the related costs of producing
products, transportation lot size, and product storage would increase,
and so would the inventory cost.
6. Managerial implications
Based on the results of the analyses in Sections 4 and 5, the major
managerial implications can be briefly summarized as follows:
(1) To the firms, the subsidy offset would increase as the trading price
increases, and the investment in carbon emissions reduction can
decrease the purchasing allowances even for a smaller limit of
carbon emissions. Accordingly, to the government, the cap and
11
Computers & Industrial Engineering 139 (2020) 106207
trade policy will not always increase suppliers’ carbon emissions,
and the green investment in carbon emissions reduction is still a
beneficial strategy for suppliers under the cap and trade policy.
(2) Under the cap and trade policy, an optimal limit for carbon emis-
sions can prevent suppliers from overly trading its quota. In other
words, the government has to carefully determine the limit of
carbon emissions within a reasonable range.
(3) Which policy is more beneficial to the supplier depends on the ef-
ficiency and offset factors of carbon emissions reduction. A higher
efficiency factor implies that the green technology is fairly effective,
and operating under the limited carbon emissions policy would be
more profitable. However, for a higher offset factor, the carbon tax
policy would become more profitable to firms. If the two factors are
both within a moderate range, operating under the cap and trade
policy would be more profitable.
(4) A supplier can choose to operate under certain carbon emissions
policy based on the upper limit of carbon emissions from the gov-
ernment. Operating under the cap and trade policy is not always
more beneficial than under the carbon tax policy for a smaller
upper limit of carbon emissions.
(5) If the carbon tax is equal to the carbon trading price, a supplier
would choose to operate under the cap and trade policy involving
incentives rather than under the carbon tax policy involving pe-
nalties.
(6) To increase the willingness of reducing carbon emissions, raising
the limit of carbon emissions is not always a good policy. The de-
termination of an appropriate carbon emissions policy which can
balance between economic growth and environmental preservation
is an important issue for the government.
(7) For a low carbon tax and a low limit of carbon emissions, firms
should choose to operate under the carbon tax policy. For a high
carbon tax and a high limit of carbon emissions, firms should
choose to operate under the limited carbon emissions policy.
(8) For a high limit of carbon emissions for the cap and trade policy and
a low limit of carbon emissions for the limited carbon emissions
policy, firms should choose to operate under the cap and trade
policy. For a high limit of carbon emissions for the limited carbon
emissions policy and a low limit of carbon emissions for the cap and
trade policy, firms should choose to operate under the limited
carbon emissions policy. When the limits for both cap and trade and
limited carbon emissions policies are the same, firms should choose
to operate under the cap and trade policy.
(9) For a lower limit of carbon, managers can only invest in green
technologies to reduce carbon emissions to comply with regula-
tions, which would result in a high total inventory cost. As the limit
of carbon emissions gradually increases, the total inventory cost
would fall. Once the limit of carbon emissions varies over a
threshold, the supply chain would not be constrained by the limit of
carbon emissions, and the total inventory cost can be maintained at
a certain level.
7. Conclusion
Due to growing environmental awareness, more and more devel-
oping countries are making regulations to firms by levying environ-
mental taxes as a penalty and/or providing a subsidy as an incentive in
order to reduce carbon emissions. Accordingly, firms have to focus on
pursuing their best interests with consideration of the government
regulations, mechanisms and incentives. This study investigates the
feasibility of investing in green technology to obtain an integrated
strategy with consideration of environmental and economic merits, and
thus offers the managerial insights for the firms’ managers to benefit
both sides of the supply chain. Moreover, the study also provides im-
portant implications for governments to make appropriate policies for
Y.-S. Huang, et al. Computers & Industrial Engineering 139 (2020) 106207

protecting the environment. In summary, the results of the study mainly range under the cap-and-trade policy to prevent suppliers from overly
indicate that firms prefer to adopt the carbon tax policy as long as the trading their quotas of carbon emissions. Future research can be ex-
efficiency of the adopted green technology is relatively higher. It should tended to an integrated inventory model with multiple retailers, be-
be noticed that production and transportation activities are still great cause suppliers may offer products to many retailers in practice. In
influential to firms’ carbon emissions, and firms should seek efficient addition, due to the fact that firms often consider their own benefits
facilities to reduce carbon emissions before inventory management is first, they may only comply with the government environmental reg-
undertaken. Moreover, the cap limit has greater effects than the carbon ulations but are not willing to take more responsibility for environ-
emissions reduction factor of the green technology, and firms should mental protection. Accordingly, making regulation with more attractive
pay more attention on the government regulation. Besides, the gov- incentives or subsides to encourage firms in taking more responsibility
ernment must set the limit of carbon emissions within a reasonable for environment is another critical issue for governments.

Appendix A

Proof of Lemma 1. Suppose that the total cost of the basic inventory model without consideration of carbon emissions, which consists of the
transportation lot size, Q, and number of shipments, n, is continuous and differentiable, and the first order derivatives with respect to n and Q are
given by
TC0 (n, Q )
n
=
Q (P
2P
D) hV DAV
n2Q
and
TC0 (n, Q )
Q
=
1
2 (h
B
2D (nAB + AV )
nQ2
2dDF
Q2 (
+ n+1
Dn
P ) h ),V respectively. Let

TC0 (n , Q) n = TC0 (n, Q) Q = 0 , we can have n (Q ) = 2DAV

andQ (n) = 2D (n (dF + AB ) + AV )
, respectively. By substituting the
(1 DP )hV Q2 n hB + hV 1 + n 1 ( D
P )
transportation lot size, Q (n) , into the number of shipments, n (Q ), we then obtain n = AV (hB + hV )
. Since the number of shipments is an
(1 DP ) (AB + dF )hV
integer, the value of n could be either AV (hB + hV )
or AV (hB + hV )
.
(1 DP ) (AB + dF )hV (1 DP ) (AB + dF )hV
In order to ensure that TC0 (n, Q) has a unique solution \{ n*, Q*\} to minimize TC0 (n *, Q*) , substituting Q (n) into TC0 (n, Q) can get the following
equation:

D (dFn + nAB + AV ) n (dF + AB ) + AV D

TC0 (n) = + hB + hV 1 + n 1 +G
2n3 (dF + AB ) + 2AV n2

n hB + hV 1 + n 1 ( D
P )
(
2n hB + hV 1 + n 1 ( ( D
P ))) P

(n )
The above equation can be rearranged as the mathematical form TC0 (n) = (n )
. Let

(n ) = (1 2) D 1Q (n) (PhB + (n (P (
D ) + P ) hV ) hB + hV 1 + ( n (P
P
D)
))
× ( 2 dDFn + 2Gn (1 2) D 1Q (n ) + 2 D (nAB + AV )) + 2 n (n (dF + AB ) + AV ) and (n) = 2(AV + (dF + AB ) n) . Note that (n) is positive and
2 (n ) 2 2 DAV (n (dF + AB ) + AV )
affine. Due to = > 0 , (n) is a strictly convex function (∵P D > 0 and AB , AV , hB , hV , F , d , P , D are greater than zero).
n2 dF + AB + AV n
n3
n (P D )
hB + hV 1 +
P
By applying Theorem 3.2.10 in Cambini and Matei (2009), it is straightforward to see that TC0 (n) is a strictly pseudo convex (i.e. unimodal)
function of n, it can imply there exist a unique solution \{ n*, Q*\} to minimize TC0 (n *, Q*) .
Moreover, by substituting the optimal transportation lot size Q (n ) into TC0 (n, Q) and let
Z (n) = (TC0 (n)) 2 = 2
(D (AV + nAB + ndF ) AV )
n (h B (
+ hV 1 + n 1 ( D
P ) ) ), it can be rearranged as Z (n) = n (1 D
P ) (A B + dF ) hV +
AV (hB + hV )
n
. Suppose that
the optimal number of shipments is n0 . By substituting the two positive integers, n0 +1 and n0 −1, which are next to n0 , into Z (n) , the resulting
values would be greater than the value which is obtained by substituting n1 into Z (n) , i.e., Z (n0 ) Z (n 0 + 1) and Z (n0 ) Z (n 0 1) . Therefore, we
have n0 (n 0 + 1)
AV (hB + hV )
and n0 (n 0 1)
AV (hB + hV )
.
D
(1 P ) (AB + dF ) hV D
(1 P ) (AB + dF ) hV
By substituting the obtained n0 from the above inequality into Q (n) , we can obtain the optimal transportation lot size of the basic inventory
model, i.e., Q0 = Q (n 0 ) . By substituting the optimal number of shipments, n0 , and transportation lot size, Q0 , in the total cost, we can obtain the
minimal total cost, TC0 (n0 , Q0 ) , of the basic inventory model. □
Proof of Lemma 2. Suppose that the total cost with consideration of the carbon tax, which consists of the transportation lot size, Q, and number of
shipments, n, which is a continuous variable, and amount of investment in green technologies, G, is continuous and differentiable, and the first order
derivatives with respect to n, Q, and G are given by
TC1 (n, Q, G )
n
=
DAV
n2Q
+ C1 ( (P D) QEh
2P
DEs
n2Q ) + (1 ) Qh ,
1
2
D
P v

TC1 (n, Q, G )
Q
=
D (dFn + nAB + Av )
nQ2
+ C1 ( ( 2 + n (1 ) ) E
1
2
D
P h
DES
nQ2
dDET
Q2 ) + (h + (1 + n (1 ) ) h ),
1
2 B
D
P v and
TC1 (n, Q, G )
G
=1+( + 2G ) C1. Let

TC1 (n, Q, G ) n = TC1 (n, Q , G ) Q = TC1 (n , Q , G ) G = 0 , we can have n (Q ) = , Q (n ) = ,

2D (AV + C1 ES ) 2D (n (d (F + C1 ET ) + AB ) + AV + C1 ES )

(1 DP )(C1Eh + hV )Q2 n C1 Eh 2 + n 1 ( D
P ) + hB + hV 1 + n 1 ( D
P )
C1 1
and G = . By substituting Q (n) into n (Q ) , we can obtain n = (AV + C1 ES )(2C1 Eh + hB + hV )
. Since the optimal number of shipments should
2 C1
(1 DP )(AB + d (F + C1ET ))(C1Eh + hV )
be an integer, the value of n could be either (AV + C1 ES )(2C1 Eh + hB + hV )
or (AV + C1 ES )(2C1 Eh + hB + hV )
.
( 1
D
P )
(AB + d (F + C1 ET ))(C1 Eh + hV ) ( 1
D
P )
(AB + d (F + C1 ET ))(C1 Eh + hV )

12
Y.-S. Huang, et al. Computers & Industrial Engineering 139 (2020) 106207

2D (AV + C1 ES ) D (AV + C1 ES ) (P D)(C1 Eh + hV )

+ 0
n3Q n2Q 2 2P

The Hessian matrix of TC1 (n, Q, G ) and determinant value are given by H = D (AV + C1 ES )
+
(P D )(C1 Eh + hV ) 2D (n (dF + AB ) + C1 (ES + dnET ) + AV )
0 and
n2Q 2 2P nQ3
0 0 2 C1
4D2 (d (F + C1 ET ) + AB )2
|H| = 2 C1 , respectively. Since , C1, D , d, ET , F, AB , n, and Q are all greater than zero, the determinant value of |H| is greater than 0,
n3Q 4
2TC (n, Q, G ) 2D (AV + C1 ES ) 2TC (n, Q, G ) 2D (n (dF + A ) + C (E + dnE ) + A ) 2TC (n, Q, G )
i.e., |H| > 0 . Moreover, = 1
, 1
Q2
= B 1 S
nQ3
T V
, and 1
= 2 C1, are all greater than zero, which
n2 n3Q G2
indicates that the total cost under the carbon tax policy is convex and has a minimum value.
By substituting the optimal transportation lot size Q (n ) into TC1 (n, Q) and let
Z (n) = (TC1 =2
(D (AV + nAB + C1 ES + nd (C1 ET + F )) AV )
(n)) 2 n
C1 Eh
(AV + C1 ES )(2C1 Eh + hB + hV )
( (2 + n ( 1 ) ) + h D
P B + hV 1 + n 1 ( ( D
P ) ) ), it can be rearranged asZ (n) = n 1 ( D
P )
(AB + d (F + C1 ET ))(C1 Eh + hV ) + n
.
Suppose that the optimal number of shipments is n1 . By substituting the two positive
integers, n1 +1 and n1 −1, which are next to n1 , into Z (n), the obtained values would be greater than the value which is obtained by substituting n1
(AV + C1 ES )(2C1 Eh + hB + hV )
into Z (n) , i.e., Z (n1 ) Z (n1 + 1) and Z (n1 ) Z (n1 1) . Therefore, we have n1 (n1 + 1) and
D
(1 P ) (AB + d (F + C1ET ))(C1Eh + hV )
(AV + C1 ES )(2C1 Eh + hB + hV )
n 1 (n 1 1) .
(1 DP ) (AB + d (F + C1ET ))(C1Eh + hV )
By substituting the obtained n1 from the above inequality into Q (n) , we can obtain the optimal transportation lot size under the carbon tax
C 1
policy, i.e., Q1 = Q (n1 ) . The optimal amount of investment in green technologies is G1 = 2 1C . Once the firm decides to invest in a green tech-
1
nology, the amount of investment has to be greater than zero, i.e., C1 > 1. By substituting the optimal number of shipments, n1 , transportation lot
size, Q1 , and amount of investment in the green technology, G1 , into the total cost, we can obtain the minimal total inventory cost, TC1 (n1 , Q1 , G1 ) ,
under the carbon tax policy. □
Proof of Proposition 1. By substituting the obtained optimal transportation lot size and number of shipments, into the total costs, we have
2C 2 1 ( C1 1)2
E (n1 , Q (n1 ), 0) E (n1 , Q (n1 ), G1 ) = 1
4C12
and TC1 (n1 , Q (n1 ), 0) TC1 (n1 , Q (n1 ), G1 ) = 4C1
> 0 . Therefore, the investment in the green
technology is feasible under the carbon tax policy. □
Proof of Lemma 3. Suppose that the total cost with consideration of the cap and trade policy, which consists of the transportation lot size, Q, and
number of shipments, n, which is continuous, and amount of investment in the green technology, G, is continuous and differentiable, and the first
order derivatives are given by
TC2 (n, Q, G )
n
=
DAV
n2Q
C2 ( (P D) QEh
2P
+
DEs
n2Q ) + (1 ) Qh ,
1
2
D
P v
TC2 (n, Q, G )
Q
=
D (dFn + nAB + Av )
nQ 2
C2

( (2 + n ( 1 ) ) E
1
2
D
P h +
Des
nQ2
+
dDET
Q2 ) + (h + (1 + n (1 ) ) h ),
1
2 B
D
P v and
TC2 (n, Q, G )
G
=1+( + 2G ) C2 . Let TC2 (n, Q, G )

n = TC2 (n, Q, G ) Q = TC2 (n, Q, G ) G = 0 , we can have n (Q) = 2D (AV + C2 ES )

, Q (n ) = 2D (n (d (F + C2 ET ) + AB ) + AV + C2 ES )
, and
(1 DP ) (C2 Eh + hV ) Q2 n C2 Eh 2 + n 1
D
P
+ hB + hV 1 + n 1
D
P

C2 1
G= . By substituting Q (n) into n (Q ) , we can obtain n = (AV + C2 ES )(2C2 Eh + hB + hV )
. Since the optimal number of shipments should be
2 C2
(1 DP )(AB + d (F + C2 ET ))(C2 Eh + hV )
an integer, the value of n could be either (AV + C2 ES )(2C2 Eh + hB + hV )
or (AV + C2 ES )(2C2 Eh + hB + hV )
.
( 1
D
P )
(AB + d (F + C2 ET ))(C2 Eh + hV ) ( 1
D
P )
(AB + d (F + C2 ET ))(C2 Eh + hV )

2D (AV + C1 ES ) D (AV + C1 ES ) (P D)(C1 Eh + hV )

n2Q2
+ 0
n3Q 2P

The Hessian matrix of TC3 (n, Q, G ) and determinant value are given by H = D (AV + C1 ES )
+
(P D)(C1 Eh + hV ) 2D (n (dF + AB ) + C1 (ES + dnET ) + AV )
0
n2Q2 2P nQ3
0 0 2 C1
4D2 (d (F + C2 ET ) + AB )2
and |H| = 2 C2 , respectively. Since , C2 , D , d, ET , AB , n, and Q are all greater than zero, the determinant value of |H| is greater than
n3Q 4
2TC (n, Q, G ) 2D (AV + C2 ES ) 2TC (n, Q, G ) 2D (n (dF + A ) + C (E + dnE ) + A ) 2TC (n, Q, G )
0, i.e., |H| > 0 . Moreover, = 3
, 2
Q2
= B 2 S
nQ3
T V
, and 2
= 2 C2 , are all greater than zero,
n2 n3Q G2
which indicates that the total cost under the cap and trade policy is convex and has a minimum value.
By substituting the optimal transportation lot size Q (n ) into TC3 (n, Q) , we can obtain
TC2 (n ) = 2 n ( ( ( ))
(D (AV + nAB + C2 ES + nd (C2 ET + F )) AV )
C2 Eh 2 + n 1 ( ( ))) D
P
+ hB + hV 1 + n 1
D
P
. Let Z (n) = (TC2 (n ))2 = 2
(D (AV + nAB + C2 ES + nd (C2 ET + F )) AV )
n

(C E (2 + n (1 ) ) + h
2 h
D
P B + h (1 + n (1
V ) ) ), this can be rearranged as Z (n) = n (1
D
P
D
P ) (A B + d (F + C2 ET ))(C2 Eh + hV ) +
(AV + C2 ES )(2C2 Eh + hB + hV )
n
.
Suppose that the optimal number of shipments is n3 . By substituting the two positive integers, n2 +1 and n2 −1, which are next to n3 , into Z (n), the
obtained values would be greater than the value which is obtained by substituting n2 into Z (n), i.e., Z (n2 ) Z (n2 + 1) and Z (n2 ) Z (n2 1) .
(AV + C2 ES )(2C2 Eh + hB + hV ) (AV + C2 ES )(2C2 Eh + hB + hV )
Therefore, we have n2 (n2 + 1) and n2 (n2 1) .
D
(1 P ) (AB + d (F + C2 ET ))(C2 Eh + hV )
D
(1 P ) (AB + d (F + C2 ET ))(C2 Eh + hV )
By substituting the obtained n2 from the above inequality into Q (n) , we can obtain the optimal transportation lot size under the carbon tax
C 1
policy, i.e., Q3 = Q (n3 ) . The optimal amount of investment in green technologies is G2 = 2 2C . Once the firm decides to invest in the green
2
technology, the amount of investment has to be greater than zero, i.e., C2 > 1. By substituting the optimal number of shipments, n2 , transportation
lot size, Q2 , and amount of investment in green technologies, G2 , into the total cost, we can obtain the minimal total inventory cost, TC2 (n2 , Q2 , G2 ) ,
under the cap and trade policy. □
Proof of Proposition 2. By substituting the obtained optimal transportation lot size and number of shipments, into the total cost, we can have
2C 2 1
( C2 1)2
E (n2 , Q (n 2 ), 0) E (n 2 , Q (n2 ), G2 ) = 2
4C22
and TC2 (n2 , Q (n 2 ), 0) TC1 (n 2 , Q (n2 ), G2 ) = 4C2
> 0. □

13
Y.-S. Huang, et al. Computers & Industrial Engineering 139 (2020) 106207

Proof of Proposition 3. By substituting the optimal transportation lot size, Q2 (n2 ) , and the amount of investment in green technologies, G2 , into
TC2 (n, Q, G ) , we have TC2 (n2 ) =
2D (AV + n2 AB + C2 ES + n2 d (C2 ET + F ))
n2 ( C E ( 2 + n (1 ) ) + h
2 h 2
D
P B (
+ hV 1 + n 2 1 ( D
P ) ) ) + C DE 2 P
( C2 1)2
4C2
C2 U ,

where the optimal number of shipments, n2 , is either (AV + C2 ES )(2C2 Eh + hB + hV )

or (AV + C2 ES )(2C2 Eh + hB + hV )
. Therefore, the upper
(1 DP )(AB + d (F + C2 ET ))(C2 Eh + hV ) (1 DP )(AB + d (F + C2 ET ))(C2 Eh + hV )
C2 Eh 2 + n2 (1
P)
+ hB + hV 1 + n2 (1
P)
(D (AV + n2 AB + C2 ES + n2 d (C2 ET + F )) AV ) D D ( C2 1)2
2 + C2 DEP
n2 4C2
limit of carbon emission is given by U = C2
.□

Proof of Lemma 4. We first suppose that the number of shipments, n, is a continuous variable. By differentiating the total cost with
respect to the number of shipments, n, transportation lot size, Q, amount of investment in green technologies, G, and
TC (n, Q, G, ) 2DPAV + Eh n2Q2 (P D) Dn2Q2hV 2D PES + n2PQ 2hV
Lagrange multiplier, , their first order derivatives are given by n
=
2n2PQ
,
TC (n, Q, G, )
Q
=
D (nAB + AV + dFn )
nQ2
+
1
2 (hB + hV n 1 (( D
P ) + 1) ) + ( (n (1 ) + 2) 1
E
2 h
D
P
D (dnET + ES )
nQ2 ), TC (n, Q, G, )
G
= ( + 2 G ) + 1, and
TC (n, Q, G , )
= DEP +
D
nQ
(ES + ndES ) +
Q
2 ( 2 + n (1 D
P ) ) E G + G U . Let TC (n, Q, G,
h
2
3 ) n = TC3 (n , Q , G, ) Q = T C3 (n, Q , G, ) G = 0.
We obtain the optimal number of shipments, transportation lot size, and amount of investment in green technologies, which are given by
1
n (Q , ) = 2D (AV + ES )
, Q (n , ) = 2D (n (AB + dF ) + AV + (dnET + ES ))
, and G ( ) = .
Q2 1( D
P )
(hV + Eh ) n hV 1 + n 1 ( D
P ) + hB + Eh 2+n 1( D
P )
2

By substituting Q (n, ) into n (Q , ) , we haven ( ) = (AV + ES )(hB + 2eh + hV )

. We are unable to obtain the closed from of the optimal
(1 DP ) (Eh + hV )(AB + d (F + ET ))

solutions due to the complexity of the problem. However, in considering the amount of investment in green technology, since and are greater
than zero and G ( ) 0 , we know that , and the number of shipments, n, has to be an integer. Numerical methods can be used to obtain the
1

optimal number of shipments, i.e., n = arg min TC3 ( n , n ) . □

Proof of Proposition 5. By substituting the optimal transportation lot size and amount of investment in green technology under the carbon tax
policy into the total cost, we can obtain TC1 (n1 ) =
2D (AV + n1 AB + C1 ES + n1 d (C1 ET + F ))
n1 (C E (2 + n (1 ) ) + h + h (1 + n (1 ) ) ) + C
1 h 1
D
P B V 1
D
P 1

DEP
( C1 1)2
4C1
. Let J1 (n1 ) =
2D (AV + n1 AB + C1 ES + n1 d (C1 ET + F ))
n1 (C E ( 2 + n ( 1
1 h 1
D
P ) ) + h + h (1 + n (1 ) ) ) , the total cost under the carbon
B V 1
D
P
( C1 1)2
tax policy can be rewritten as TC1 (n1 ) = J1 (n1 ) + C1 DEP 4C1
. By substituting the optimal transportation lot size and amount of investment in
green technology under the cap and trade policy into the total cost, we can obtain
TC2 (n2 ) =
2D (AV + n2 AB + C2 ES + n2 d (C2 ET + F ))
n2 ( C E ( 2 + n (1 ) ) + h
2 h 2
D
P B (
+ hV 1 + n 2 1 ( D
P ) ) ) + C DE 2 P
( C2 1)2
4C2
C2 U2. Let J2 (n 2 ) =
2D (AV + n2 AB + C2 ES + n2 d (C2 ET + F ))
n2 (C E (2 + n (1 ) ) + h
2 h 2
D
P B (
+ hV 1 + n 2 1 ( D
P ))) , the total cost under the cap and trade policy can be
( C2 1)2
rewritten as TC2 (n2 ) = J2 (n 2 ) + C2 DEP 4C2
C2 U . The difference in the total cost between the carbon tax and cap and trade policies is
2C 2 C + C ( 2C1 C22 + C2 )
thus given by TC1 (n1 ) 1 2
+ C2 U . For TC1 (n1 ) TC2 (n 2 ) = 0 , which indicates
1
TC2 (n 2 ) = J1 (n1 ) J2 (n 2 ) + (C1 C2 ) DEP + 4 C1 C2
2C 2 C + C
J1 (n1 ) J2 (n2 ) + (C1 + C2) DEP + 1 2 2

that the inventory cost under the two policies is the same, the limit of the carbon tax policy is given by U2 ,
4 C1 C2
= C2
where n1 = arg min TC1 ( n1 , n1 ) and n2 = arg min TC2 ( n2 , n 2 ) . □
Proof of Proposition 6. When C1 = C2 = C , the optimal solutions under the two policies would be the same. The optimal transportation lot size for
the two policies is given by Q1 (n) = Q2 (n) = 2D (n (d (F + CET ) + AB ) + AV + CES )
. The optimal number of shipments has to satisfy the inequality,
D D
n CEh 2 + n 1 + hB + hV 1 + n 1
P P

(AV + CES )(2CEh + hB + hV )

which is given by n (n 1) n (n + 1) . The optimal amount of investment in green technologies under the two
(1 DP ) (AB + d (F + CET ))(CEh + hV )
C 1
policies would be the same which is given by G1 = G2 = 2 C
. By substituting the optimal solutions into the total inventory cost and carbon
emissions function, we can have TC1 (n1 , Q1 , G1 ) TC2 (n2 , Q2 , G2 ) = C2 U2 and E1 (n1 , Q1 , G1 ) E2 (n2 , Q2 , G2 ) = 0 . □

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Y.-S. Huang, et al.
Yeu-Shiang Huang is currently a professor in the Department of Industrial and
Information Management at National Cheng Kung University, Taiwan. He earned both his
M.S. and Ph.D. degrees in Industrial Engineering from the University of Wisconsin-
Madison, U.S.A. His research interests include operations management, supply chain
management, reliability engineering, and decision analysis. Related papers have ap-
peared in such professional journals as IIE Transactions, Naval Research Logistics, IEEE
Transactions on Engineering Management, European Journal of Operational Research,
Reliability Engineering and System Safety, Software Testing, Verification and Reliability, IEEE
Transactions on Reliability, International Journal of Production Research, Computers and
Operations Research, Computers and Industrial Engineering, Communications in Statistics, and
others.
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Computers & Industrial Engineering 139 (2020) 106207
Chih-Chiang Fang is currently an associate professor in the School of Computer Science
and Software at Zhaoqing University, Guangdong, China. He received his Ph.D. degree in
the Department of Industrial and Information Management at National Cheng Kung
University, Taiwan. His research interests include decision analysis, Bayesian statistical
methods, and reliability engineering. Related papers have appeared in such professional
journals as Naval Research Logistics, Decision Support Systems, IEEE Transactions on
Reliability, IEEE Transactions on Engineering Management, Computers and Industrial
Engineering, International Journal of Production Economics, and others.
Ying-An Lin is a graduate student in the Department of Industrial and Information
Management at National Cheng Kung University, Taiwan.