Discussion Paper Details

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Title: Climate Regulation and Emissions Abatement: Theory and Evidence from Firms' Disclosures

Author(s): Tarun Ramadorai and Federica Zeni

Publication Date: November 2019

Keyword(s): abatement, Carbon Emissions, climate change, climate regulation, Dynamic Models, information asymmetry and reputation

Programme Area(s): Financial Economics and Industrial Organization

Abstract: We use data from the Carbon Disclosure project (CDP) to measure firms' beliefs about climate regulation, their plans for future abatement, and their current actions on mitigating carbon emissions. These measures vary both across firms and time in a manner that is especially pronounced around the Paris climate change agreement announcement. A simple dynamic model of carbon abatement with a firm exposed to a certain future carbon levy, facing a trade-off between emissions reduction and capital growth, and convex emissions abatement adjustment costs cannot explain the data. A more complex two-firm dynamic model with both information asymmetry across firms and reputational concerns fits the data far better. Our findings imply that firms' abatement actions depend greatly on their beliefs about climate regulation, and that both informational frictions and reputational concerns can amplify responses to climate regulation, increasing its effectiveness.

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Bibliographic Reference

Ramadorai, T and Zeni, F. 2019. 'Climate Regulation and Emissions Abatement: Theory and Evidence from Firms' Disclosures'. London, Centre for Economic Policy Research.