Carbon tax and emission trading policies have been introduced under the Kyoto Protocol to reduce greenhouse gas emissions. This paper examines the effect of these policies on supply chain behavior to determine an optimal strategy for improving environmental performance via system dynamics simulation. For this purpose, a supply chain is considered under the carbon tax policy, where a supplier and a producer have both green and non-green methods for transportation and production. About the carbon tax, the question is what carbon price encourages the supplier and the producer to use the green methods, and how each will behave at different carbon prices. Furthermore, to analyze emission trading policy, several supply chains are considered simultaneously and a method is developed to determine the carbon trading price in the market to maximize supply chains’ profit. The supply chains’ behavior is simulated based on system dynamics and several experiments were conducted to analyze the effect of different scenarios of carbon regulations on the supply chains. Findings emphasize the need for tailored policies, challenging the notion of a one-size-fits-all approach to emission trading. Overall, this research provides valuable insights into the dynamic interplay between environmental sustainability and economic considerations in the context of evolving carbon policies.

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