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Vertical acquisition and carbon capture and storage choices under cap-and-trade regulation with sustainable finance

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  • Chen, Shi
  • Zhao, Yonghong
  • Chang, Chuen-Ping
  • Lin, Jyh-Horng
  • Chang, Ching-Hui

Abstract

In this paper, we establish a contingent claim framework for environmental management. The paper focuses on the vertical acquisition of a supply chain in the context of sustainable insurance (i.e., sustainable finance), specifically considering carbon capture and storage (CCS) technology choices and cap-and-trade regulations. The main results are as follows. Firstly, a more stringent cap-and-trade scheme increases equity efficiency in sustainable insurance, particularly when the green upstream manufacturer with advanced CCS technology acquires the brown downstream manufacturer, which also uses advanced CCS technology. Secondly, it harms risk efficiency, especially when the green upstream manufacturer with backward CCS technology acquires the brown downstream manufacturer, which uses advanced CCS technology. Thirdly, it increases the default risk in the insurer's equity, especially when the green upstream manufacturer with backward CCS technology acquires the brown downstream manufacturer, which also uses backward CCS technology. Overall, cap-and-trade's effects on equity and risk efficiency in vertical acquisition and default risk in insurer's equity within sustainable insurance depend on adopting CCS technology. Policymakers should incentivize advanced CCS technologies in vertical acquisitions to enhance equity and reduce default risks, supporting long-term financial stability and environmental sustainability toward Sustainable Development Goals.

Suggested Citation

  • Chen, Shi & Zhao, Yonghong & Chang, Chuen-Ping & Lin, Jyh-Horng & Chang, Ching-Hui, 2024. "Vertical acquisition and carbon capture and storage choices under cap-and-trade regulation with sustainable finance," Energy Economics, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:eneeco:v:139:y:2024:i:c:s0140988324006200
    DOI: 10.1016/j.eneco.2024.107912
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    More about this item

    Keywords

    Cap-and-trade; Carbon capture and storage; Sustainable development goals; Sustainable insurance; Vertical acquisition;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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