Interplay Between Green Investment and Market Price Premia in Global Shipping

ABSTRACT Existing research emphasises that the driver of green investment is its future profitability. This paper shows that other investors' decisions also influence green investment. We take the example of scrubber installation in shipping, which is optional by regulation but has an established market for trading its underlying asset. It requires an initial capital expenditure but generates increased profitability due to fuel savings and higher freight income. However, the volatility of fuel prices and freight rates renders it challenging for investors to decide on the installation. To examine this dilemma, we develop and estimate a Vector Error Correction Model across the tanker and dry bulk shipping sectors from 2021 to 2024. The results indicate the existence of both short‐ and long‐run cointegrating relationships among the freight rate premium, fuel savings and the size of the scrubber‐fitted fleet. A 1% increase in the share of the scrubber‐fitted fleet decreases the freight rate premium by 1.4%–3.8% and fuel savings by 0.6%–1.9%. We are the first to provide empirical evidence regarding the peer effect of green investment on market price premia. When undertaking green investments, it is important to consider others' decisions as the potential oversupply of the asset can reduce its future profitability.