Abstract

Feed supplements have recently been touted as an effective means to reducing methane emissions from livestock (e.g., cattle and sheep). In this paper, we examine the environmental implication of this innovation in a supply chain setting. We develop a parsimonious game theoretical model to study a farmer’s production and adoption decisions and the manufacturer’s pricing decision for the supplement. We find that the use of feed supplement may have unintended consequences because it could incentivize the farmer to increase the livestock production quantity, resulting in more methane emissions. Although reducing the feed supplement’s production cost (e.g., R&D grants) incentivizes more adoption of the supplement, the total methane emissions may be higher. Similarly, providing financial incentives to farmers for methane emission reductions (e.g., carbon credits) may cause more damages to the environment. We extend our model to a competitive setting with two symmetric farmers and demonstrate that these findings are robust in this setting. These results vanish when the farmer does not strategically adjust its livestock quantity, thereby highlighting the important role of endogenizing the farmer’s production decision when examining the effectiveness of feed supplement in curbing methane emissions. Our findings also caution that government support to the manufacturers for production cost reductions (or to the farmers for cutting methane emissions) may backfire from the environmental perspective.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.  

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• Keyword(s):
• operations 148
• sustainability 26

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