Climate Regulation and Emissions Abatement: Theory and Evidence from Firms' Disclosures
75 Pages Posted: 4 Dec 2019 Last revised: 16 Aug 2020
Date Written: November 2019
We use data from the Carbon Disclosure project (CDP) to measure firms' beliefs about climate regulation, their plans for future abatement, and their current actions on mitigating carbon emissions. These measures vary both across firms and time in a manner that is especially pronounced around the Paris climate change agreement announcement. A simple dynamic model of carbon abatement with a firm exposed to a certain future carbon levy, facing a trade-off between emissions reduction and capital growth, and convex emissions abatement adjustment
costs cannot explain the data. A more complex two-firm dynamic model with both information asymmetry across firms and reputational concerns fits the data far better. Our findings imply that firms' abatement actions depend greatly on their beliefs about climate regulation, and that both informational frictions and reputational concerns can amplify responses to climate regulation, increasing its effectiveness.
Keywords: abatement, Carbon Emissions, climate change, climate regulation, Dynamic Models, information asymmetry, reputation
JEL Classification: G31, G38, Q52, Q54
Suggested Citation: Suggested Citation