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Timing and eco(nomic) efficiency of climate-friendly investments in supply chains

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  • Lukas, Elmar
  • Welling, Andreas

Abstract

Emission trading schemes such as the European Union Emissions Trading System (EUETS) attempt to reconcile economic efficiency with 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 continue to be mutually exclusive. This problem is even worse if a climate-friendly project depends on investing in of a whole supply chain. We model a sequential bargaining game in a supply chain where the parties negotiate over implementation of a carbon dioxide (CO2) saving investment project. We show that the outcome of their bargaining is not economically efficient and even less ecologically efficient. Furthermore, we show that a supply chain becomes less economically efficient and less ecologically efficient with every additional chain link. Finally, we make recommendations for how managers or politicians can improve the situation and thereby increase economic as well as ecological efficiency and thus also the eco-efficiency of supply chains.

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  • Lukas, Elmar & Welling, Andreas, 2014. "Timing and eco(nomic) efficiency of climate-friendly investments in supply chains," European Journal of Operational Research, Elsevier, vol. 233(2), pages 448-457.
    • Handle: RePEc:eee:ejores:v:233:y:2014:i:2:p:448-457
    DOI: 10.1016/j.ejor.2013.03.017
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    9. Dahlen, Niklas & Fehrenkötter, Rieke & Schreiter, Maximilian, 2024. "The new bond on the block — Designing a carbon-linked bond for sustainable investment projects," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 316-325.
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    13. Banerjee, Shantanu & Güçbilmez, Ufuk & Pawlina, Grzegorz, 2014. "Optimal exercise of jointly held real options: A Nash bargaining approach with value diversion," European Journal of Operational Research, Elsevier, vol. 239(2), pages 565-578.
    14. Qinglong Gou & Liang Liang & Zhimin Huang & Susan X. Li, 2017. "Editor’s Introduction," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 899-905, July.
    15. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
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    18. Qinpeng Wang & Longfei He & Daozhi Zhao & Michele Lundy, 2018. "Diverse Schemes of Cost Pooling for Carbon-Reduction Outsourcing in Low-Carbon Supply Chains," Energies, MDPI, vol. 11(11), pages 1-17, November.

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