Green supply chain with strategic retailers: Transportation-based carbon penalty

Transportation, especially consumers' traveling to physical stores in supply chains, is a key source of greenhouse gas emissions. Therefore, many countries consider transportation-based carbon penalties to mitigate carbon emissions. This paper employs a Hotelling model with two retailers, a continuum of consumers and carbon taxes related to consumers' travel to retailers. Retailers strategically choose their store locations and prices in response to different carbon tax mechanisms. First, we focus on the effects of carbon tax imposition by comparing retailers' equilibrium locations and prices as well as corresponding welfare implications in two cases. In Case 1, with the carbon tax imposed on consumers, retailers maintain at the midpoint of the Hotelling line, resulting in the highest carbon emissions. In contrast, in Case 2, with the carbon tax imposed on retailers, a suitably designed tax rate (neither too low nor too high) moves retailers to the midpoints of their respective market segments, minimizing carbon emissions. Then, we extend our model to a more general Case 3, which allows for carbon taxes on consumers and retailers, alongside a lump-sum subsidy to consumers. Our analysis demonstrates that a well-designed carbon tax and subsidy system can create a “win-win-win-win” scenario: retailers benefit from higher prices, consumers enjoy reduced travel distances and the subsidy, the government collects carbon tax revenue, and greenhouse gas emissions decrease. Our findings suggest that policymakers should scrutinize the environmental and economic effects of carbon tax systems, particularly the implications of tax imposition and revenue allocation on green supply chain management.