Outsourcing Climate Change

Abstract

This paper examines how firms combat climate change and the motivations behind their strategies. Using firm-level carbon emissions and import volume data, we find pervasive evidence of firms outsourcing their emissions to foreign suppliers rather than investing in abatement—a strategy not fully explained by production offshoring, regulatory arbitrage, and supply chain shocks. Instead, our findings reveal that agency problems play a significant role in facilitating corporate carbon outsourcing. While the outsourcing strategy improves short-term profitability, it adversely affects firm value and increases the cost of equity capital, suggesting that investors demand compensation for their exposure to such transition risks.

Keywords: Outsourcing Emissions, Imports, Stakeholders, Reputational Risk, Green Technologies, Carbon Premium

JEL Classification: G23, G30, G34, M14