Recently, environmental concerns have drawn worldwide attention. As a result, the international communities have put pressure on both governments and industries to develop environmental conservation policies and green products, respectively. Also, the consumers’ environmental awareness has increased to the point that today’s consumers consider the greenness of the products in addition to the purchase price. In this study, we consider an industry consisting of two manufacturers that compete over selling price and carbon emissions, while the government levies a carbon emissions tax. We formulate the problem using a game-theoretic approach assuming the leader–follower relationship between the government and industry. The manufacturers maximize their profits, while the government maximizes three components: social welfare, environmental conservation, and revenues. We study the problem in two different settings: one in which the manufacturers have similar powers (Nash) and one in which one manufacturer is the leader in the market (Stackelberg). We find that superiority in production technology or a lower unit production cost does not necessarily lead to a lower selling price and that the outcome depends on the carbon emission tax rate. Based on a numerical experiment, government intervention reduces the total carbon emissions by more than almost half in both settings. We also found that an industry with Nash structure is preferred from the perspective of the consumers.
