Firms'And States'Responses to Laxer Environmental Standards

16 Pages Posted: 26 Mar 2019

See all articles by Tito Cordella

Tito Cordella

World Bank

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Date Written: March 14, 2019

Abstract

On June 1, 2017, President Trump announced the United States' withdrawal from the Paris agreement on climate change. Despite this decision, American firms continued investing in low-carbon technologies and some states committed to tougher environmental standards. To understand this apparent paradox, this paper studies how a weakening of environmental standards affects the behavior of profit-maximizing firms. It finds that a relaxation of emission standards (i) may increase firms' incentives to adopt clean technologies, but not to pollute less; (ii) may negatively affect industry profitability if it is perceived as temporary; and, when this is the case, (iii) the unilateral adoption of stricter standards by large states may increase the expected profitability of every firm.

Keywords: Global Environment, Private Sector Economics, Climate Change and Health, Science of Climate Change, Climate Change and Environment, Energy and Mining, Energy Demand, Energy and Environment, Regulatory Regimes, Environmental Strategy, Environmental & Natural Resources Law, Judicial System Reform, Legal Reform, Legal Products, Social Policy, Legislation, Environmental Management

Suggested Citation

Cordella, Tito and Devarajan, Shantayanan, Firms'And States'Responses to Laxer Environmental Standards (March 14, 2019). World Bank Policy Research Working Paper No. 8781. Available at SSRN: https://ssrn.com/abstract=3360139

Tito Cordella (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-0043 (Phone)

Shantayanan Devarajan

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

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