398 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 60, NO. 2, MAY 2013 Strategic Closed-Loop Facility Location Problem With Carbon Market Trading Ali Diabat, Tarek Abdallah, Abbas Al-Refaie, Davor Svetinovic, and Kannan Govindan Abstract—The burgeoning environmental regulations are forc- ing companies to green their supply chains by integrating all of their business value-adding operations so as to minimize the impact on the environment. One dimension of greening the supply chain is extending the forward supply chain to collection and recovery of products in a closed-loop configuration. Remanufacturing is the basis of profit-oriented reverse logistics in which recovered prod- ucts are restored to a marketable condition in order to be resold to the primary or secondary market. In this paper, we introduce a multiechelon multicommodity facility location problem with a trading price of carbon emissions and a cost of procurement. The company might either incur costs if the carbon cap, normally as- signed by regulatory agencies, is lower than the total emissions, or gain profit if the carbon cap is higher than the total emissions. A numerical study is presented which studies the impact of different carbon prices on cost and configuration of supply chains. Index Terms—Carbon credits, closed-loop supply chain, disposal, flexible legislation, recycling, remanufacturing, reverse logistics. I. INTRODUCTION A S the debate over sustainability heats up, companies are increasingly interested in greening their supply chains by integrating all of their business value-adding operations so as to minimize the impact on the environment. The old view of “greening as a burden” is changing to “greening as a poten- tial competitive advantage” [1]. One dimension of greening the supply chain is extending the forward supply chain to the collec- tion and recovery of products. Product recovery systems, also known as reverse logistics, focus on the management of back- ward flow of products in order to minimize costs and ensure proper disposal, reuse, or remanufacturing of the products. One Manuscript received August 29, 2011; revised March 1, 2012 and June 18, 2012; accepted July 6, 2012. Date of publication September 14, 2012; date of current version April 13, 2013. Review of this manuscript was arranged by Department Editor J. Sarkis. A. Diabat is with the Program of Engineering Systems and Management, Masdar Institute of Science and Technology, Abu Dhabi, UAE (e-mail: adia- bat@masdar.ac.ae). T. Abdallah is with the Department of Management Sciences, University of Waterloo, Waterloo, ON N2L 3G1, Canada (e-mail: t3abdall@uwaterloo.ca). A. Al-Refaie is with the Department of Industrial Engineering, University of Jordan, Amman 11942, Jordan (e-mail: abbas.alrefai@ju.edu.jo). D. Svetinovic is with the Program of Computing and Information Sci- ence, Masdar Institute of Science and Technology, Abu Dhabi, UAE (e-mail: dsvetinovic@masdar.ac.ae). K. Govindan is with the Department of Business and Economics, University of Southern Denmark, DK-5230 Odense M, Denmark (e-mail: gov@sam.sdu.dk). Color versions of one or more of the figures in this paper are available online at http://ieeexplore.ieee.org. Digital Object Identifier 10.1109/TEM.2012.2211105 definition of reverse logistics has been proposed by Rogers and Tibben-Lembke [2]: The process of planning, implementing, and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods, and related information from the point of consumption to the point of origin, for the purpose of recapturing value or proper disposal. Remanufacturing is the basis of profit-oriented reverse logis- tics in which recovered products are restored to a marketable condition in order to be resold to the primary or secondary market. Companies are increasingly interested in remanufactur- ing their end-of-life products due to the advantages over waste management (i.e., disposal) in terms of profitability and sus- tainability. Remanufacturing has been successfully applied to products such as computers, tires, printers, brake systems, toner cartridges, vehicle engines, batteries, and cameras [3]. In many industries, the complexity of the reverse supply chain is affected by upstream decisions in the forward supply chain. For example, the cost and technology choice for retreading an end-of-life tire is affected by the original manufacturer’s tech- nology used to produce that tire. Thus, in order to increase the efficiency and effectiveness of the remanufacturing process, companies should integrate reverse logistics into the forward supply chain, thus forming a closed-loop supply chain. The advantage of establishing a closed-loop supply chain rather than separate forward and reverse supply chains is that it al- lows for a higher level of coordination among stakeholders in both channels to achieve better system performance as com- pared to allowing each decision maker to pursue his own local objectives [4]. The growing importance of green closed-loop supply chains stems not only from the economic benefits of remanufacturing but also from legislative initiatives. The past decade has seen an increase in environmental legislation such as recycling regula- tions, packaging regulations, and mandated product take-back. The automobile and the electronics industries in particular are under increasing legal pressure to recover their products and their e-waste as evidenced by, for example, the directive on Waste of Electrical and Electronics Equipment (WEEE), and the directive on Restriction on Hazardous Substances [5]. Along with product recovery legislation, international and national organizations have been setting greenhouse gas (GHG) reduction targets. In 1997, the Kyoto protocol, which would limit the amount of GHGs released to the atmosphere, was signed by representatives of 160 nations. The protocol under- scores the growing consensus that GHGs are responsible for global warming. The European trading system (ETS) came into force in 2005. Its aim was to reduce GHG emissions by around 0018-9391/$31.00 © 2012 IEEE