Swept under the Rug: Distortionary Effect of Carbon Price on Emissions Disclosure Accuracy

Abstract

Data insufficiency remains a challenge to the mitigation of financial instability from climate-related risks. In response, government authorities around the world have started mandating corporate sustainability disclosure. Still, little is understood about the accuracy of such disclosure. To address this gap, we construct a micro-economic model to study a typical firm’s optimal decisions on greenhouse gas abatement and disclosure. We find that a high carbon price may paradoxically encourage firms to under-disclose their emissions, which in turn weakens their abatement incentives. We also explore how institutional factors mediate the incentive distortion from carbon pricing. Using a sample of global listed companies, the empirical estimation supports our arguments.

Keywords: carbon price, emissions disclosure, transition risk, net zero, emissions abatement

JEL Classification: G32, M14, Q56, Q58