Managing carbon footprints in inventory management

There is a broad consensus that mankind must reduce carbon emissions to mitigate global warming. It is generally accepted that carbon emission trading is one of the most effective market‐based mechanisms to curb the amount of carbon emissions. This paper investigates how firms manage carbon footprints in inventory management under the carbon emission trading mechanism. We derive the optimal order quantity, and analytically and numerically examine the impacts of carbon trade, carbon price, and carbon cap on order decisions, carbon emissions, and total cost. We make interesting observations from the numerical examples and provide managerial insights from the analytical results.