Strategic Supply Chain Decisions Under Environmental Regulations: When to Invest in End-of-Pipe and Green Technology

Abstract In this paper, we study the green technology and end-of-pipe abatement decisions of a multi-facility firm along with its facility size decisions. We utilize a model that captures three different environmental regulations: (1) emissions tax, (2) emissions permit-trading, and (3) command-and-control. Our results show that if the variable emissions tax, permit price or emissions penalty is nonzero, the firm should always invest in green technology emissions reductions. In general, we observe an all-or-nothing trend regarding end-of-pipe abatement investment. In particular, the firm invests in best available end-of-pipe abatement technology (BACT-EOP) when the variable emissions tax, permit price or emission penalty is greater than the per unit cost of end-of-pipe abatement. Moreover, we show that investments in end-of-pipe abatement can enhance investments in green technology, but that investments in end-of-pipe abatement should be pursued secondarily. Furthermore, we find that while the facility size, and consequently the local and global transportation emissions, are not impacted by an emissions tax regulation, facility size is impacted by an emissions permit trading or command-and-control emissions regulation. With regards to emissions, frequently there is a direct trade-off between local vs. global transportation and production emissions. To illustrate, we show that regulations that yield the lowest local production emissions, i.e. emissions from a single facility, do not always yield the lowest global production, and local and global transportation emissions. In fact, the conditions that yield the lowest local transportation emissions yield the largest global transportation emissions, and vice versa.