Investment Timing and Eco(nomic)-Efficiency of Climate-Friendly Investments in Supply Chains

Abstract

Emission trading schemes like the European Union Emissions Trading System (EUETS) try to reconcile economic efficiency and ecological efficiency by creating financial incentives for companies to invest in climate-friendly innovations. Using real options methodology we demonstrate that under uncertainty economic and ecological efficiency are still mutually exclusive. This problem is even tightened if a climate-friendly project depends on investments of a whole supply chain. We model a sequential bargaining game in a supply chain where the parties negotiate about the implementation of a carbon dioxide (CO2) saving investment project. We show that the outcome of their bargaining is not economic efficient and even less ecological efficient. Furthermore, we can show that a supply chain is getting less economic efficient and less ecological efficient with every additional chain link. Finally, we give recommendations how managers or politicians could improve the situation and thereby increase the economic as well as the ecological efficiency of supply chains