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

74 Pages Posted: 24 Oct 2019 Last revised: 11 Apr 2024

See all articles by Tarun Ramadorai

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Federica Zeni

World Bank

Date Written: May 19, 2023

Abstract

We construct measures of firms' beliefs about climate regulation, plans for future abatement, and current emissions mitigation from responses to the Carbon Disclosure Project. These measures vary in a pronounced, distinctive fashion around the Paris announcement. A dynamic model of a representative firm exposed to a future carbon levy, trading-off mitigation against capital growth, facing convex abatement adjustment costs does not fit the data; but a two-firm model with cross-firm information asymmetry and reputational externalities does. Out-of-sample, the model predicts reversals following the US exit from the Paris agreement. We conclude that abatement is strongly affected by firms' beliefs about climate regulation, and cross-firm interactions amplify the impact of regulation.

Keywords: climate change, climate regulation, carbon emissions, dynamic models, belief heterogeneity, reputation, abatement

JEL Classification: G31, G38, Q52, Q54

Suggested Citation

Ramadorai, Tarun and Zeni, Federica, Climate Regulation and Emissions Abatement: Theory and Evidence from Firms’ Disclosures (May 19, 2023). European Corporate Governance Institute – Finance Working Paper No. 730/2021, Available at SSRN: https://ssrn.com/abstract=3469787 or http://dx.doi.org/10.2139/ssrn.3469787

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Federica Zeni

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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