The Race Among Firms for Carbon Pricing

Abstract

Although carbon pricing should have a nontrivial impact on firms' environmental performance, prior studies have paid little attention to the type and number of carbon pricing mechanisms (CPMs) that firms adopt simultaneously. Thus, in this study, we analyze multiple CPMs within a single framework, including carbon trading on compliance markets, carbon tax, and internal carbon pricing. By reference to a sample of 2,303 CPM-adopting firms, we capture the relative impacts of the presence of both single and multiple CPMs on firms' environmental performance as measured in terms of Carbon Intensity, Energy Intensity, and Environmental Score. The results show that while a carbon tax can independently lead to significant improvements in environmental performance, carbon trading and internal carbon pricing are ineffective on their own and can even be detrimental in some cases. Significant heterogeneities are found with regard to the effectiveness of CPMs in carbon-intensive sectors versus other sectors and across different regions. Finally, we provide insights into how environmental innovation and board independence moderate the effects of CPMs on environmental performance.

Keywords: Carbon pricing mechanisms, Carbon markets, carbon tax, internal carbon price, Environmental Performance