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Operational Compliance Levers, Environmental Performance, and Firm Performance Under Cap and Trade Regulation

Author

Listed:
  • James Kroes

    (College of Business and Economics, Boise State University, Boise, Idaho 83725)

  • Ravi Subramanian

    (College of Management, Georgia Institute of Technology, Atlanta, Georgia 30332)

  • Ramanath Subramanyam

    (Department of Business Administration, University of Illinois at Urbana-Champaign, Champaign, Illinois 61820)

Abstract

Cap and trade programs impose limits on industry emissions but offer individual firms the flexibility to choose among different operational levers toward compliance, including inputs, process changes, and the use of allowances to account for emissions. In this paper, we examine the relationships among (1) levers for compliance (at-source pollution prevention, end-of-pipe pollution control, and the use of allowances); (2) environmental performance; and (3) firm market performance for the context of stringent cap and trade regulation with allowance grandfathering (i.e., the allocation of allowances for free). To investigate these relationships, we use data on publicly traded utility firms operating coal-fired generating units regulated by the U.S. Acid Rain Program from three principal sources: the U.S. Energy Information Administration, the U.S. Environmental Protection Agency, and the Compustat database. Our results indicate a significant relationship between better environmental performance and lower firm market performance over at least a three-year period. From a regulatory perspective, our results show a negative association between allowance grandfathering and firm environmental performance. Overall, by explicitly considering the context of stringent regulation, we find a counter-example to the view that better environmental performance generally associates with better economic performance.

Suggested Citation

  • James Kroes & Ravi Subramanian & Ramanath Subramanyam, 2012. "Operational Compliance Levers, Environmental Performance, and Firm Performance Under Cap and Trade Regulation," Manufacturing & Service Operations Management, INFORMS, vol. 14(2), pages 186-201, April.
    • Handle: RePEc:inm:ormsom:v:14:y:2012:i:2:p:186-201
    DOI: 10.1287/msom.1110.0357
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