Strategic Green Investment in Supply Chains: When Altruism Meets Carbon Policy

In a detailed investigation led by researchers from the School of Economics and Management at China University of Petroleum (East China) and the Department of Materials and Production at Aalborg University, the interplay between carbon tax policy, technology spillovers, and altruistic behavior in green technology investment across competitive supply chains is rigorously modeled and analyzed. The paper focuses on horizontally competing manufacturers and explores how strategic investment decisions evolve under carbon taxation when firms not only weigh their own profits but also consider the benefits to their downstream retailers. As global economies turn to carbon pricing mechanisms, like Denmark’s €159 per ton carbon tax and Canada’s projected CAD 170 per ton by 2030, understanding these interactions is more critical than ever. The researchers use a game-theoretic approach to examine three investment scenarios: no investment, unilateral investment, and bilateral investment. Each is assessed in terms of profits, retail dynamics, consumer welfare, and environmental impact.

Free Riders, Spillovers, and Competitive Advantage

One of the central challenges identified in the study is the impact of technology spillovers on manufacturers' incentives to invest in green innovation. These spillovers, often arising from knowledge sharing, reverse engineering, or workforce mobility, mean that one firm's investments can inadvertently benefit its competitors. In a unilateral investment scenario, a single manufacturer adopts green technology while the other benefits without bearing the cost, a classic case of free-riding. The analysis reveals that as the non-investing firm’s absorptive capacity increases, the investing manufacturer’s motivation declines, eroding the competitive edge derived from innovation. However, in scenarios where both manufacturers invest, the model finds that this dynamic can be mitigated, particularly when technology absorption capacities differ significantly. The equilibrium shifts depending on whether firms can leverage spillovers to their advantage without triggering widespread underinvestment. While spillovers can dilute incentives, they also foster industry-wide diffusion of green technology when paired with other favorable conditions.

Altruism Pays Off, Especially for Retailers

A particularly novel dimension of the study is the inclusion of altruistic preferences, behavioral factors that lead manufacturers to consider not only their profits but also those of downstream retailers. This altruism is quantified in the model and shown to significantly influence investment choices. When altruistic preference is low, firms behave purely out of self-interest and are more likely to avoid green investments when spillovers are high. But as altruism increases, manufacturers become more willing to invest, even in the face of possible free-riding, because part of their utility is tied to retailer welfare. The analysis demonstrates that as altruistic preferences rise, retailer profits increase, product prices drop, and overall efficiency across the supply chain improves. Retailers benefit most under bilateral investment scenarios, where both upstream partners engage in green innovation, thus delivering the highest product sustainability and pricing advantages. This insight suggests that fostering stronger partnerships between manufacturers and retailers could be an untapped driver of sustainable industrial transformation.

Green Investment Improves Welfare, But Taxes Must Be Calibrated

While carbon taxes are generally seen as a nudge toward sustainability, the research underscores the need for careful calibration. High carbon tax levels, when coupled with strong spillover potential, may backfire by disincentivizing firms from making green investments due to elevated costs and competitive risks. Conversely, moderate taxes are shown to strike the right balance, encouraging investment while maintaining profitability. The findings also highlight how tax-induced green investments contribute to improved consumer surplus and social welfare. Under bilateral investment, retail prices drop significantly, making green products more accessible. Meanwhile, emissions are reduced to the greatest extent, maximizing environmental benefits. Scenarios that include only unilateral investment still offer improvements over no investment, but they fail to fully optimize sustainability outcomes. The researchers recommend that policymakers avoid uniform tax structures and instead adopt differentiated models tailored to sector-specific innovation dynamics and spillover risks.

Strategic Lessons for Policymakers and Industry Leaders

The study’s implications stretch far beyond theory. For policymakers, the authors advise implementing tax regimes that recognize inter-firm spillovers and encourage cooperation over competition where possible. Supplementary tools like R&D subsidies and knowledge-sharing platforms can prevent the erosion of innovation incentives. For example, the Tesla model of selectively open patents shows how controlled transparency can serve both business and environmental goals. Manufacturers are urged to safeguard their intellectual assets while embracing collaborative approaches in areas where mutual benefits outweigh risks. Retailers, on the other hand, should track manufacturers’ green investment behaviors and adapt their procurement and pricing strategies to optimize their position in the sustainable supply chain. Ultimately, the study reveals that when carbon taxes are well-designed and firms act with a blend of self-interest and altruism, the result is not only a cleaner environment but also a more resilient and efficient supply network.