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Can Capital Markets Create Incentives for Pollution Control?

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  • Paul Lanoie
  • Benoit Laplante
  • Maité Roy

Abstract

It has been observed that upon trading-off the costs and benefits of pollution control, profit-maximizing firms may choose not to invest their resources in pollution abatement since the expected penalty imposed by regulators falls considerably short of the investment costs. Regulators have recently embarked on a deliberate strategy to release information to markets (investors and consumers) regarding firms' environmental performance in order to enhance incentives for pollution control. In this paper, we analyze the role that capital markets may play to create such incentives. Evidence drawn from American and Canadian studies indicates that capital markets react to the release of information, and that large polluters are affected more significantly from such releases than smaller polluters. This result appears to be a function of the regulator's willingness to undertake strong enforcement actions as well as the possiblity for capital markets to rank and compare firms with respect to their environmental performance. Il a été observé que, par rapport au compromis entre les coûts et les bénéfices du contrôle de la pollution, les entreprises maximisant leurs profits peuvent choisir de ne pas investir leurs ressources dans la réduction de la pollution puisque la pénalité imposée par le législateur est considérablement plus faible que les coûts de l'investissement nécessaire. Récemment, les législateurs se sont engagés dans une stratégie délibérée qui a pour objet de rendre disponibles, aux agents économiques (investisseurs et consommateurs), des informations portant sur la performance environnementale des entreprises. Dans cet article, nous analysons le rôle que le marché des capitaux joue dans la création de tels incitatifs. Les résultats obtenus d'études américaines et canadiennes indiquent que le marché des capitaux réagit à la publication d'information, et que les grands pollueurs sont plus affectés que les petits. Ces résultats semblent être fonction de la capacité pour le marché des capitaux de classer et de comparer les entreprises selon leur performance environnementale et de la crédibilité du législateur quant aux actions coercitives qu'il peut entreprendre.

Suggested Citation

  • Paul Lanoie & Benoit Laplante & Maité Roy, 1997. "Can Capital Markets Create Incentives for Pollution Control?," CIRANO Working Papers 97s-05, CIRANO.
    • Handle: RePEc:cir:cirwor:97s-05
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    References listed on IDEAS

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    Cited by:

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    2. Rachel Bouvier, 2009. "Determinants of Environmental Performance," Economic Development Quarterly, , vol. 23(2), pages 111-126, May.
    3. Stavins, Robert N., 2003. "Experience with market-based environmental policy instruments," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 9, pages 355-435, Elsevier.
    4. Khanna, Madhu & Quimio, Wilma Rose H. & Bojilova, Dora, 1998. "Toxics Release Information: A Policy Tool for Environmental Protection," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 243-266, November.
    5. Madhu Khanna, 2001. "Non‐Mandatory Approaches to Environmental Protection," Journal of Economic Surveys, Wiley Blackwell, vol. 15(3), pages 291-324, July.
    6. Dasgupta, Susmita & Hettige, Hemamala & Wheeler, David, 2000. "What Improves Environmental Compliance? Evidence from Mexican Industry," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 39-66, January.
    7. Sangeeta Bansal & Shubhashis Gangopadhyay, 2005. "Incentives for Technological Development: BAT Is BAD," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 30(3), pages 345-367, March.
    8. Basu, Arnab K. & Chau, Nancy H., 2001. "Market Access Rivalry and Eco-labeling Standards: Are Eco-labels Non-tariff Barriers in Disguise?," Working Papers 127662, Cornell University, Department of Applied Economics and Management.
    9. Iulie Aslaksen & Terje Synnestvedt, 2003. "Corporate environmental protection under uncertainty," Discussion Papers 355, Statistics Norway, Research Department.
    10. Dasgupta, Susmita, 1999. "Opportunities for improving environmental compliance in Mexico," Policy Research Working Paper Series 2245, The World Bank.
    11. Solan, Eilon & Zhao, Chang, 2023. "When (not) to publicize inspection results," Journal of Economic Theory, Elsevier, vol. 210(C).
    12. Caplan, Arthur J., 2003. "Reputation and the control of pollution," Ecological Economics, Elsevier, vol. 47(2-3), pages 197-212, December.
    13. Keren Priyadarshini & Omprakash K. Gupta, 2003. "Compliance to Environmental Regulations: The Indian Context," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 2(1), pages 9-26, April.
    14. Wheeler, David, 2001. "Racing to the bottom : foreign investment and air pollution in developing countries," Policy Research Working Paper Series 2524, The World Bank.
    15. Domenico Siniscalco & Stefania Borghini & Marcella Fantini & Federica Ranghieri, 2001. "Environmental Information and Company Behavior," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 251-280, National Bureau of Economic Research, Inc.
    16. Paramati, Sudharshan Reddy & Alam, Md Samsul & Apergis, Nicholas, 2018. "The role of stock markets on environmental degradation: A comparative study of developed and emerging market economies across the globe," Emerging Markets Review, Elsevier, vol. 35(C), pages 19-30.
    17. Nordström, Håkan & Vaughan, Scott, 1999. "Trade and the environment," WTO Special Studies, World Trade Organization (WTO), Economic Research and Statistics Division, volume 4, number 4.
    18. Amarnath Ananthanarayanan, 1998. "Is There A Green Link A Panel Data Value Event Study Of The Relationship Between Capital Markets And Toxic Releases," Departmental Working Papers 199818, Rutgers University, Department of Economics.
    19. Yuling Yuan & Dukangqi Li, 2023. "Urban Economic Efficiency, Environmental Factors, and Digital Finance: Impacts on Sustainable Development in Chinese Cities," Sustainability, MDPI, vol. 15(18), pages 1-22, September.
    20. D'Orazio, Paola & Dirks, Maximilian W., 2020. "The impact of climate-related fiscal and financial policies on carbon emissions in G20 countries: A panel quantile regression approach," Ruhr Economic Papers 860, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    21. Dasgupta, Susmita & Laplante, Benoit & Mamingi, Nlandu, 1998. "Capital markets responses to environmental performance in developing countries," Policy Research Working Paper Series 1909, The World Bank.

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    More about this item

    Keywords

    Environment; Financial Markets; Regulation; Environnement; marchés financiers; réglementation;
    All these keywords.

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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