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

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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)

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    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.

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    File URL: http://www.fww.ovgu.de/fww_media/femm/femm_2012/2012_26.pdf
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    Bibliographic Info

    Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 120026.

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    Length: 29 pages
    Date of creation: Oct 2012
    Date of revision:
    Handle: RePEc:mag:wpaper:120026

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    Web page: http://www.ww.uni-magdeburg.de
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    Related research

    Keywords: Emission trading; Optimal investment timing; Real options; Game theory; Supply chain management; Eco-efficiency;

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    References

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    1. Pindyck, Robert S., 2002. "Optimal timing problems in environmental economics," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1677-1697, August.
    2. Triantis, Alexander J & Hodder, James E, 1990. " Valuing Flexibility as a Complex Option," Journal of Finance, American Finance Association, vol. 45(2), pages 549-65, June.
    3. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    4. Yue, Jinfeng & Austin, Jill & Wang, Min-Chiang & Huang, Zhimin, 2006. "Coordination of cooperative advertising in a two-level supply chain when manufacturer offers discount," European Journal of Operational Research, Elsevier, vol. 168(1), pages 65-85, January.
    5. Gurnani, Haresh & Erkoc, Murat & Luo, Yadong, 2007. "Impact of product pricing and timing of investment decisions on supply chain co-opetition," European Journal of Operational Research, Elsevier, vol. 180(1), pages 228-248, July.
    6. Goh, Mark & Lim, Joseph Y.S. & Meng, Fanwen, 2007. "A stochastic model for risk management in global supply chain networks," European Journal of Operational Research, Elsevier, vol. 182(1), pages 164-173, October.
    7. Lin, Tyrone T. & Ko, Chuan-Chuan & Yeh, Hsin-Ni, 2007. "Applying real options in investment decisions relating to environmental pollution," Energy Policy, Elsevier, vol. 35(4), pages 2426-2432, April.
    8. Burak Kazaz & Maqbool Dada & Herbert Moskowitz, 2005. "Global Production Planning Under Exchange-Rate Uncertainty," Management Science, INFORMS, vol. 51(7), pages 1101-1119, July.
    9. John C. Harsanyi & Reinhard Selten, 1972. "A Generalized Nash Solution for Two-Person Bargaining Games with Incomplete Information," Management Science, INFORMS, vol. 18(5-Part-2), pages 80-106, January.
    10. Bruce Kogut & Nalin Kulatilaka, 1994. "Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network," Management Science, INFORMS, vol. 40(1), pages 123-139, January.
    11. Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
    12. Giannoccaro, Ilaria & Pontrandolfo, Pierpaolo, 2004. "Supply chain coordination by revenue sharing contracts," International Journal of Production Economics, Elsevier, vol. 89(2), pages 131-139, May.
    13. Alvarez, Luis H.R. & Stenbacka, Rune, 2007. "Partial outsourcing: A real options perspective," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 91-102, February.
    14. Cvsa, Viswanath & Gilbert, Stephen M., 2002. "Strategic commitment versus postponement in a two-tier supply chain," European Journal of Operational Research, Elsevier, vol. 141(3), pages 526-543, September.
    15. Nagarajan, Mahesh & Sosic, Greys, 2008. "Game-theoretic analysis of cooperation among supply chain agents: Review and extensions," European Journal of Operational Research, Elsevier, vol. 187(3), pages 719-745, June.
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