We extend the dual sourcing model based on the newsvendor framework by considering the environmental impact of transport. In our context, dual sourcing means that a company, e.g. a retailer, uses an offshore and an onshore supplier. We include environmental regulations for transport in the model. Firstly, emission taxes for the transport from the offshore source are considered. It can be shown that with increasing emissions taxes the company sources less from offshore. This improves the environmental performance but the economic performance (expected profit) is severely harmed. Secondly, we propose that an emission trading scheme is valid for transport activities. In this case, the optimal policy turns out to be a two-sided control-limit policy. If the emission limit (expressed in product units) is set to the minimal offshore order quantity the environmental impact of transport can be reduced while the economic performance is nearly not affected. Thus, from managerial perspective emission trading is preferred to an emission tax on transport. Also from the perspective of policy-making emission trading is reasonable as it helps to limit the negative environmental impact of transport but does not strongly reduce the competitiveness of individual companies.

This paper empirically estimates the effect of tax exemptions from the carbon tax and energy taxon emissions in Sweden. After the tax exemptions in 1992, carbon dioxide emissions from theSwedish industrial sector increased by, on average, over 34 percent, compared to a synthetic control unit constructed from a comparable group of OECD countries. The main finding is robust to various placebo tests, robustness tests and a dose-response test, suggesting that the tax exemptions are the driver of the result.

The question of how to design efficient environmental policies has become one of the most important questions of our time, but finding the answer it is not easy. Simple models of environmental regulation do not take into account the complexity of real markets. One aspect that is sometimes ignored is the market structure of the regulated industry. This critical review of the literature shows that market structure can both influence and be influenced by environmental regulation and that determining the optimal environmental policy is complicated.