Abstract: This paper focuses on a two-stage supply chain consisting of one carbon-emission-dependent manufacturer and one supplier. The low-carbon preference customers are considered and the optimal strategy choices with ‘cap and trade’ policy and carbon emission reduction technology are investigated. If the carbon cap is not sufficient, the manufacturer may purchase extra carbon emission permit or adopt carbon reduction technology, or both of them to maximize the profits. By using the Newsboy model, it is found that the both of them policy will be the optimal choice for the manufacturer. The government should be cautious to implement carbon trading, because it will increase the total carbon emissions. In order to achieve the decrease in the total carbon emissions and enhance the economic benefits, the government can encourage the enterprises to invest in carbon reduction technology and set an appropriate carbon cap simultaneously.

Key words: cap and trade, carbon emission reduction technology, emission-dependent supply chain, strategic choice, game theory