Abstract: Under low-carbon policy, the emission reduction decision of supply chain is studied. The manufacturer-dominant situation is discussed by using Stackelberg game, and a new production optimization model for a two-level supply chain composed of a supplier and a manufacturer is built. The optimal yield and emission reduction per product are obtained through the converse solution method. With numerical simulation, the application of the model is illustrated. It is shown that the optimal emission reduction decision of an enterprise is to make its marginal emission reduction cost similar to the marginal cost of the corresponding emission rights in the market. The emission reduction of one side in a supply chain can promote the other. Thus, the enterprises have the motivation to cooperate in emission reduction. Research and development can be an origin of force. Additionally, it turns out that, in terms of sensitivity of coefficient, optimal yield is the same with emission reduction per product. Increasing publicity effort to improve low-carbon environmental awareness of customers is a key to ensure healthy growth of low-carbon economy and corporate profit.

Key words: carbon emissions, emission reduction, low carbon, technology innovation, supply chain management