Dynamic Carbon Emission Management

52 Pages Posted: 27 Jun 2022 Last revised: 6 Apr 2023

See all articles by Maria Cecilia Bustamante

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Francesca Zucchi

European Central Bank

Date Written: June 1, 2022


The control of carbon emissions by policymakers poses the corporate challenge of developing an optimal carbon management policy. We provide a unified model that characterizes how firms should optimally manage emissions through production, green investment, and the trading of carbon credits, as well as the implications for asset prices. We show that carbon regulation induces firms to tilt towards more immediate yet transient types of green investment---such as abatement as opposed to innovation---as it becomes more costly to comply. Perhaps surprisingly, firms with a large stock of carbon credits are less committed to curbing emissions. Lastly, even if more polluting firms command a higher risk premium, carbon regulation need not reduce firm value.

Keywords: Carbon Emissions, Carbon Abatement, Green Innovation, Carbon Credits, Carbon Trading, Carbon Tax, Asset Prices

JEL Classification: G30,G31,G12,D62,O33

Suggested Citation

Bustamante, Maria Cecilia and Zucchi, Francesca, Dynamic Carbon Emission Management (June 1, 2022). Available at SSRN: https://ssrn.com/abstract=4140380 or http://dx.doi.org/10.2139/ssrn.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

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314

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