Strategic decision for capacity portfolio in supply chain network considering emission permit price and demand uncertainty

This paper develops a modeling approach to investigate supply chain firms’ strategic decisions to select a capacity portfolio in green technologies for their operations. Our approach enables one to study the equilibrium solution of the entire supply chain network with multiple suppliers and manufacturers. The market and policy-based uncertainties in emission permit price and customer demand are considered, while the supply chain firms can purchase or sell the credit for emission on a carbon emission trading market. We propose a stochastic two-stage model in which the technological capacity investment should be determined in the first stage of the game considering both permit price and demand uncertainties. Once the uncertainties are clear in the second stage, supply chain firms will decide upon their quantity and price to their customers. Proposed analytical and numerical results elucidate the uncertainty value of carbon permit price from novel real option perspectives. The result reveals that the uncertainty of carbon price might have a two-sided impact, both as a risk factor and a potential opportunity for investing in green technologies. The numerical case study shows results corresponding to a paradox, resulting in a balance between cooperation and competition between supply chain parties. We further show why the supply chain members should act strategically to get in a suboptimal choice for all parties involved in the network.