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

Elmar Lukas () and Andreas Welling ()
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Elmar Lukas: Faculty of Economics and Management, Otto-von-Guericke University Magdeburg
Andreas Welling: Faculty of Economics and Management, Otto-von-Guericke University Magdeburg

No 120026, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

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.

Keywords: Emission trading; Optimal investment timing; Real options; Game theory; Supply chain management; Eco-efficiency (search for similar items in EconPapers)
JEL-codes: D81 G34 M11 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2012-10
New Economics Papers: this item is included in nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:mag:wpaper:120026

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