Carbon trading is a market-based mechanism for controlling carbon emissions by providing economic incentives to reduce emissions. In recent years, there has been an increasing interest in modeling supply chain networks under this scheme; however, to date, only a limited number of researchers have investigated the implication of this mechanism for biofuel supply chains. The optimization model presented in this paper examines a trade-off between the cost of trading carbon credits and costs associated with outsourcing of the biomass pretreatment process when carbon emissions exceed the predetermined carbon cap in a biofuel supply chain. To demonstrate the applicability of the model, we analyzed challenges in supplying different sources of biomass to two biorefinery plants and shipping the produced biofuels to multiple demand zones. The results showed that carbon emission reductions have a relatively nonlinear pattern when the carbon credit price increases linearly. Furthermore, we presented significant managerial and policy insights on the impact of different carbon emission caps on total costs and total emissions. Moreover, we analyzed the cost adjustment between trading carbon credits and outsourcing decisions for different carbon cap settings. This paper ends with suggestions for further development of the presented model for future researches.