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

75 Pages Posted: 4 Dec 2019 Last revised: 16 Aug 2020

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: November 2019

Abstract

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

Ramadorai, Tarun and Zeni, Federica, Climate Regulation and Emissions Abatement: Theory and Evidence from Firms' Disclosures (November 2019). CEPR Discussion Paper No. DP14155, Available at SSRN: https://ssrn.com/abstract=3496645

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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