Managing Spillovers in Supplier Decarbonization under Competition

Consumer-facing firms increasingly invest in suppliers' carbon-reduction technologies to lower product carbon footprints. When suppliers serve competing downstream firms, however, such investments may spill over to rivals, creating a supplier decarbonization dilemma: buyer-led investment can reduce emissions but also erode the investor's competitive advantage. We develop a game-theoretical model of two firms in quantity competition in which a focal firm invests in a supplier's carbon-reduction technology and a rival may benefit through shared-supplier spillovers. We show that spillovers reduce the focal firm's investment and profit, and may also increase total emissions. The environmental outcome is governed by three forces: spillovers spread cleaner technology to the rival, weaken the focal firm's investment incentive, and change total production. Although spillovers diffuse cleaner technology, total emissions can rise when reduced investment and output-scale effects dominate the diffusion benefit, especially under intermediate competition. We then compare two spillover-management schemes: carbon offsets and royalty fees. Contrary to common intuition, offsets always increase supplier technology investment by expanding the focal firm's green demand and production scale. Royalty fees increase investment only when the fee is sufficiently low; a high fee can shrink the rival's use of the shared technology, reducing the royalty base and the focal firm's marginal return from investment. Both schemes can achieve an all-win outcome---higher profits for both firms and lower emissions---only when initial emission intensity is low. Offsets additionally require low investment cost and not-too-intense competition, whereas royalty fees require a sufficiently low fee. When initial emission intensity is high, only royalty fees can deliver a second-best outcome, raising total profit and reducing emissions by disciplining output expansion. Our results provide an operational guide for managing green technology spillovers in competitive supply chains.