Working Paper: CEPR ID: DP14155
Authors: Tarun Ramadorai; Federica Zeni
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 adjustmentcosts 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.
Keywords: climate change; climate regulation; carbon emissions; dynamic models; information asymmetry; reputation; abatement
JEL Codes: G31; G38; Q52; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms' beliefs about the intensity of climate regulation (L51) | Firms' planned abatement activities (Q52) |
| Firms' beliefs about the intensity of climate regulation (L51) | Firms' actual abatement activities (Q52) |
| Firms exposed to a future carbon levy (H32) | Firms' emissions reduction strategies (Q52) |
| Reputational externalities (D62) | Firms' reactions to regulatory announcements (G18) |
| Firms' plans for future emissions reductions (D25) | Firms' responses to climate regulation events (Q52) |
| Firms' strategic interactions (L21) | Firms' emissions reduction efforts (Q52) |