Supply Chain Leakage of Greenhouse Gas Emissions

Abstract

Climate change has been a major global risk and a key driver for greenhouse gas (GHG) emissions reduction. Yet, internal emissions reduction of firms may create a leakage that leads to higher emissions in the supply chain. The related literature suggests that such emissions leakage is explained by the pollution haven hypothesis. We propose and find evidence for an alternative reason for supply chain leakage, one that is driven by innovation and optimization of supply chain activities. Using panel data from Bloomberg Environmental, Social, and Governance (ESG) and Bloomberg Supply Chain (SPLC), we estimate our models at a firm and supplier dyadic level using two-way cluster robust standard error and dyadic robust error estimations, treating different sources of endogeneity. We find empirical evidence of a supply chain leakage effect – a higher level of supplier emissions is associated with a lower level of firm internal emissions. More importantly, supplier innovation can be a major driver behind the leakage – the supply chain leakage effect is heightened when a supplier is more innovative. Further, the role of innovation is strengthened when a supplier has similar technological capabilities to the focal firm. We also find that climate risk exposure impacts supply chain leakage in an asymmetrical pattern—focal firm climate risks heighten leakage while supplier climate risks mitigate leakage. Our findings suggest that supply chain leakage may not be completely driven by pollution haven motives, but by supply chain innovation and optimization that may be beneficial in the long term.