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Climate Regulation and Emissions Abatement: Theory and Evidence from Firms’ Disclosures

Author

Listed:
  • Tarun Ramadorai

    (Imperial College Business School, Imperial College London, London SW7 2AZ, United Kingdom; Centre for Economic and Policy Research (CEPR), Washington, District of Columbia 20009)

  • Federica Zeni

    (World Bank Development Research Group, The World Bank, Washington, District of Columbia 20433)

Abstract

We measure firms’ beliefs about climate regulation, plans for future abatement, and current emissions mitigation from responses to the Carbon Disclosure Project. These measures vary strikingly around the Paris announcement. A dynamic model of a representative firm facing a future carbon levy, trading off abatement and capital growth, and facing convex adjustment costs cannot fit the data. A two-firm model with crossfirm reputational externalities, heterogeneous beliefs over climate regulation, and leader-follower interactions does. Out of sample, the model predicts firms’ reactions when the United States exits the Paris agreement. Firms’ beliefs about climate regulation strongly affect abatement, and crossfirm interactions amplify regulatory impacts.

Suggested Citation

  • Tarun Ramadorai & Federica Zeni, 2024. "Climate Regulation and Emissions Abatement: Theory and Evidence from Firms’ Disclosures," Management Science, INFORMS, vol. 70(12), pages 8366-8385, December.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8366-8385
    DOI: 10.1287/mnsc.2021.00482
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