Effect of raw material substitution on sustainable facility location under carbon tax policy

Current environmental issues and challenges have a direct impact on firms' strategic and operational decisions in terms of location, transport and production. In this work, we propose to investigate a firm that reconsiders its location and production decisions under a carbon tax policy on transport-related carbon emissions. Traditionally sustainable facility location models under carbon pricing scheme assume that firm supply is given (complementary essential inputs). In our framework, input mix and location decision are allowed to vary simultaneously. The relationship between the production level and the input quantities is captured through a production function that enables different degrees of substitutability among the raw material quantities. The results show that variation in the elasticity of substitution across the different types of inputs affects the firm location and supply choices. Moreover, it plays a crucial role in controlling the level of the pollution stemming from commodity shipping through adjustments in the input supply quantities. Our analysis also reveals the sensitivity of the facility location decision to a higher carbon tax when firm has a high flexibility on its ability to substitute among the input quantities.