Climate-Related Disclosures: What Are the Economic Trade-Offs?

45 Pages Posted: 20 Jul 2023 Last revised: 2 Dec 2023

See all articles by Lucas Mahieux

Lucas Mahieux

Tilburg University - Tilburg University School of Economics and Management

Haresh Sapra

Booth School of Business, University of Chicago

Gaoqing Zhang

University of Minnesota - Twin Cities - Department of Accounting

Date Written: December 1, 2023

Abstract

We study the real effects of climate-related disclosures in a setting in which domestic productions generate direct greenhouse gas emissions while outsourcing to foreign suppliers generates indirect emissions. A key friction in our model is the disparity in the quality and the consistency of emissions data reported across the globe. We show that mandatory disclosures of direct emissions are desirable as firms fail to internalize the long-term environmental losses caused by physical climate risks. However, such disclosures induce emissions leakage by exacerbating indirect emissions. Similarly, mandating indirect emissions disclosures leads to reverse emissions leakage. We show, perhaps surprisingly, that when indirect emissions information is noisier, regulators should mandate less precise disclosures of direct emissions. We also show, regulators should tailor the design of indirect emissions reporting requirements to the compositions of physical vs. transition risk in firms' climate risk profiles. Our results help reconcile the varying approaches policy makers in Europe and the United States have adopted in mandating and designing climate reporting policies.

Keywords: Climate-Related Disclosures, Climate Risks, Physical Risk, Transition Risk, Greenhouse Gas Emissions, Direct and Indirect Emissions, Market Discipline, Real Effects

JEL Classification: D21, G01, G18, G21, G38, M41, Q51, Q54, Q58

Suggested Citation

Mahieux, Lucas and Sapra, Haresh and Zhang, Gaoqing, Climate-Related Disclosures: What Are the Economic Trade-Offs? (December 1, 2023). Available at SSRN: https://ssrn.com/abstract=4507526 or http://dx.doi.org/10.2139/ssrn.4507526

Lucas Mahieux (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Haresh Sapra

Booth School of Business, University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Gaoqing Zhang

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://carlsonschool.umn.edu/faculty/gaoqing-zhang

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