The effect of uncertainty on production-inventory policies with environmental considerations

We consider a manufacturing firm whose production is characterized by polluting emissions, an incorporated pollution abatement process, and continuous-time inventory control. Recognizing the stochastic nature of both pollution and inventory dynamics, we study the impact of consumer demand and pollution uncertainty on production-inventory policies under environmental costs/taxes imposed on the manufacturer. We find that the manufacturer, facing environmental uncertainty, reduces both inventory and pollution levels in the long run. The same effect is observed in terms of inventories under proportional and progressively growing environmental taxes but not necessarily in terms of pollution. In particular, emission taxes most impact expected steady-state inventories while ambient pollution taxes combat long-run pollution levels.