Abstract: Recently, carbon emissions have become one of the primary reasons for global warming, resulting in many natural problems, such as melting of glaciers and rising sea levels. To control such problems, governments have enacted many policies to reduce carbon emissions, among which, the carbon cap and trade scheme allows firms to buy and sell excess emission credits, and has become one of the most favorable modes to reduce emissions with its unique flexibility. With the advance of emission trade market, there are many firms that provide emission credits for production, namely emission allowance suppliers. Although the carbon cap and trade scheme has brought considerable benefits to firms, the fluctuation of carbon price and demand uncertainty have become the main risks of this mode. With the development of carbon financial market, a series of carbon financial products based on carbon options have become the main tools to hedge such risks of carbon price fluctuations and demand uncertainty. On the other hand, facing severe carbon emission problems and strict policies, firms have started to implement remanufacturing strategy to reduce carbon emissions and production cost. This paper investigates the pricing strategy and coordination in a supply chain with carbon emission option contract under a remanufacturing environment. Based on the newsvendor model, we develop a supply chain model consisting of an emission allowance supplier (Stackelberg leader) and an emission-dependent remanufacturer (follower), and then establish decentralized and centralized decision-making models. Using backward induction, the optimal solutions of different models are derived, and the role of emission option contract in supply chain coordination is further discussed. Finally, numerical examples are conducted to illustrate sensitivity analyses of several key parameters. The results show that, the optimal total amount of carbon allowance purchased by the remanufacturer is not affected by the wholesale price of the wholesale contract. Compared with the emission option contract, the amount of carbon allowances purchased through the wholesale contract is more sensitive to the emission option price and exercise price. Under a certain condition, a single emission option contract can coordinate the supply chain. However, when the supply chain is coordinated, the emission option contract cannot achieve the optimal pricing strategies of decentralized scenario. An increase in remanufacturing rate and carbon emission ceiling can increase both the total expected profit of the supply chain and the channel efficiency. If the demand of carbon emission allowance is large, the remanufacturer prefers emission option contract than the wholesale price contract. Our findings enrich the theory of supply chain with remanufacturing under emission option contract and can help stakeholders make decisions to align the financial and environmental objectives.

Key words: emission option contract, remanufacturing, pricing strategy, supply chain coordination