Optimal financing and carbon emission reduction strategies under cap-and-trade and reward-penalty policies

With the implementation of low-carbon policies, responsible firms have adopted remanufacturing or invested in green technologies to reduce emissions. The sustainability actions, i.e., remanufacturing and investment in green technologies, are significantly influenced by national policies and financial constraints. This study explores optimal production and carbon reduction strategies, as well as financing preferences, in an outsourcing remanufacturing supply chain involving a well-capitalized original equipment manufacturer (OEM) and a capital-constrained outsourced remanufacturer (UR) under cap-trade and reward-penalty policies. We compare three emission reduction approaches – OEM-only, UR-only, and joint emission reduction under two financing options: bank loans and trade credit. Our results show that: (1) The joint emission abatement model generates the highest sales quantities but the lowest retail prices for new and remanufactured products. (2) As the reward-penalty intensities increase, OEMs’ strategies shift from UR-only to joint emission reduction, while URs’ strategies shift from OEM-only to joint emission reduction. (3) When URs face severe capital shortages, OEMs tend to provide trade credit regardless of interest rates, while URs with moderate capital choose between bank and trade credit depending on financing rates. Stronger reward-penalty incentives and higher carbon prices amplify financing needs and further strengthen OEMs’ motivation to support URs through trade credit.