DP14155 Climate Regulation and Emissions Abatement: Theory and Evidence from Firms' Disclosures

Author(s): Tarun Ramadorai, Federica Zeni
Publication Date: November 2019
Date Revised: July 2020
Keyword(s): abatement, Carbon Emissions, climate change, climate regulation, Dynamic Models, information asymmetry, reputation
JEL(s): G31, G38, Q52, Q54
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14155

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.