Climate Regulation and Emissions Abatement: Theory and Evidence from Firms’ Disclosures

Abstract

We construct measures of firms’ beliefs about climate regulation, plans for future abatement, and current actions on emissions mitigation, using Carbon Disclosure Project data. These measures vary significantly around the Paris climate change agreement announcement. A dynamic model of a representative firm exposed to a future carbon levy, trading-off emissions reduction against capital growth, and facing convex emissions abatement adjustment costs cannot explain these patterns. A two-firm model with cross-firm information asymmetry and reputational externalities does far better. Our findings imply that abatement is strongly affected by firms’ beliefs about climate regulation, with cross-firm interactions amplifying the effectiveness of regulation.

Keywords: climate change, climate regulation, carbon emissions, dynamic models, information asymmetry, reputation, abatement

JEL Classification: G31, G38, Q52, Q54