Optimizing carbon tax compliance in steel manufacturing through green finance-driven internal supply chain management

This paper models an internal supply chain for a steel manufacturer, involving multiple inputs purchased and transported to produce, transport, and sell carbon-intensive steel in the domestic and foreign markets. A life insurer provides financing to the manufacturer, and the insurer's equity is assessed using a capped call option framework that accounts for the borrower's operational risks—an approach aligned with green finance principles. The model evaluates how carbon taxes and steel export levels influence the equity of both the manufacturer and the insurer, providing insight into sustainable production and financing strategies. Key findings indicate that reduced steel exports increase the manufacturer's equity and lower the insurer's equity risk, contributing to the mitigation of carbon leakage. Domestic carbon taxes primarily reduce emissions in local markets, while export carbon taxes are more effective in curbing cross-border carbon leakage. These effects are more pronounced within internal supply chains compared to external supply chains, regardless of transportation-related carbon footprints considered in the model. Lower carbon tax burdens also incentivize the adoption of green finance mechanisms. Overall, the results highlight the role of carbon taxation and sustainable finance in promoting low-carbon steel production, s supporting the achievement of the United Nations Sustainable Development Goals, specifically Goals 3 (Good health and well-being) and 7 (Affordable and clean energy). • The impact of carbon taxes across supply chains is examined in steel production. • A capped call option model assesses equity with operational and credit risks. • Higher carbon cost burdens are identified under internal supply chain settings. • Export carbon taxes are shown to cut leakage and support cleaner trade patterns. • Green finance risk is linked to carbon policy and firm pollution intensity.