Evaluating the effects of environmental regulations on a closed-loop supply chain network: a variational inequality approach

Global climate change has encouraged international and regional adoption of pollution taxes and carbon emission reduction policies. Europe has taken the leadership in environmental regulations by introducing the European Union Emissions Trading System (EU-ETS) in 2005 and by developing and promoting a set of policies destined to lower carbon emissions from transport sectors. These environmental policies have significantly affected the production choices of European energy and industrial sectors. In this paper, we propose a closed-loop supply chain network model that includes raw material suppliers, manufacturers, consumers, and recovery centers. The objective of this paper is to formulate and optimize the equilibrium state of this closed-loop supply chain network assuming that manufacturers are subject to the EU-ETS and a carbon tax is imposed on truck transport. The model is optimized and solved by using the theory of variational inequalities. The developed model is able to capture carbon regulation, recycling, transportation and technological factors within a unified framework and to capture their effects on production and CO2 emission generation. Our analysis shows that the combined application of the EU-ETS at manufacturers’ tier and the carbon tax on truck transport implies additional costs for producers that reduce the production of goods. This has a positive outcome for environment since CO2 emissions reduce as well. An increase of the efficiency level of the recycling process leads to an increase of the reusable raw material in the reverse supply chain. However, this production of reusable raw material can be negatively affected when a carbon tax is imposed on transport between recovery centers and manufacturers. Finally, the distance between couple of CLSC tiers plays a very important role. The lower is the distance covered by vehicles, the higher is the production of goods and the lower is the CO2 emitted.