Emissions are on the rise in the maritime industry, jeopardizing global climate change goals and, hence, attracting the attention of regulatory authorities. Carbon regulation based on market-based mechanisms (MBMs) is a possible instrument to reduce emissions and encourage the adoption of clean technologies in the maritime industry. An example of such a mechanism is an emission trading scheme (ETS), which puts a global cap on emissions and distributes emission licenses to the ship owners. This paper focuses on the question of how the ship owner's optimal investment policy over time is shaped under regulation based on an ETS. We develop a dynamic programming model to investigate the effects of an ETS on ship owner’s investment decisions, which are subject to uncertainty concerning demand for pollution and regulatory risks. The results indicate that the optimal investment policy for the ship owners needs to take into account the trade-off between costs of installing technological measures and expected future cost reductions through higher carbon efficiency. Furthermore, the investment increases with the ship owner’s current demand for pollution. Last, but not the least, we explore how the investment policy is affected, when there is an increase in uncertainty concerning the pollution demand and regulatory risks.
Franz Buchmann is a PhD Candidate with the Department of Operations Management at Copenhagen Business School. He received the M.Sc. degree in Advanced Economics and Finance from Copenhagen Business School and the B.Sc. in Economics from Ludwig Maximilians University of Munich. Franz Buchmann’s doctoral research delves into the questions of how to decarbonize the maritime industry and which role regulatory measures can play in this process.
Leonardo P. Santiago received the Ph.D. degree in systems engineering from Boston University, USA. He is currently an Associate Professor with the Department of Operations Management at Copenhagen Business School. His research has been published in academic journals such as the IEEE Transactions on Engineering Management, Management Science, Technological Forecasting and Social Change, Computers and Industrial Engineering, among others. His research inquiries scrutinize the technology and innovation management process, with particular focus on resource allocation, learning dynamics, and sustainable business model innovation.