Dynamic Carbon Emission Management

Posted: 27 Jun 2022

See all articles by Maria Cecilia Bustamante

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Francesca Zucchi

Federal Reserve Board

Date Written: June 1, 2022

Abstract

The control of carbon emissions by policymakers poses the new corporate challenge of developing an optimal carbon management strategy. We provide a unified model that characterizes how firms should optimally manage emissions through production, green investments, and carbon trading, as well as the implications for asset prices. Under a carbon trading scheme, firms adopt precautionary policies such as under-producing compared to a laissez-faire benchmark. Perhaps surprisingly, firms with a large stock of credits are less committed to reducing emissions. More generally, carbon regulation does not necessarily reduce firm value and, furthermore, induces firms to tilt towards more immediate yet transient types of green investment as it becomes more costly to comply. We also show that polluting firms command a higher risk premium.

Suggested Citation

Bustamante, Maria Cecilia and Zucchi, Francesca, Dynamic Carbon Emission Management (June 1, 2022). Available at SSRN: https://ssrn.com/abstract=4140380

Maria Cecilia Bustamante (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

HOME PAGE: http://https://sites.google.com/a/rhsmith.umd.edu/mcbustam/?pli=1

Francesca Zucchi

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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