Dynamic Carbon Emission Management

60 Pages Posted: 27 Jun 2022 Last revised: 30 May 2024

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

Abstract

Carbon regulation poses the corporate challenge of developing a carbon management
policy. We provide a unified model characterizing how firms should optimally manage
emissions through production, green investment, and the trading of carbon credits.
We show that carbon pricing reduces emissions, but also induces firms to shift towards
more immediate yet transient types of green investment—such as abatement
instead of innovation—as it becomes costlier to comply. Pricing carbon below its social
cost, combined with a green innovation subsidy, mitigates this shift and ensures not
only a reduction in current emissions but also a faster transition to more sustainable
technologies.

Keywords: Carbon Emissions, Carbon Abatement, Green Innovation, Carbon Credits, Carbon Tax, Green Subsidies

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
Germany

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