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Can capital markets create incentives for pollution control?

Author

Listed:
  • Lanoie, Paul
  • Laplante, Benoit
  • Roy, Maite

Abstract

After weighing the costs and benefits of pollution control, profit-maximizing firms sometimes choose not to invest in pollution abatement because the penalty they expect regulators to impose for noncompliance falls short of the cost of abatement. To improve incentives for pollution control, regulators have recently embarked on a strategy to release information to communities and markets (investors and consumers) about firms'environmental performance. Drawing on evidence from American and Canadian studies, the authors report that capital markets do react to the release of such information. The evidence suggests that heavy polluters are affected more significantly than minor polluters. And firms whose market values are hurt most by the release of this information are most likely to invest in pollution abatement. The firms'greater willingness to invest in pollution abatement seems to result from the regulators'willingness to undertake strong enforcement actions combined with the possibility of capital markets reacting to public ranking of firms in terms of their environmental performance.

Suggested Citation

  • Lanoie, Paul & Laplante, Benoit & Roy, Maite, 1997. "Can capital markets create incentives for pollution control?," Policy Research Working Paper Series 1753, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1753
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    Citations

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    Cited by:

    1. Rachel Bouvier, 2009. "Determinants of Environmental Performance," Economic Development Quarterly, , vol. 23(2), pages 111-126, May.
    2. 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.
    3. Madhu Khanna, 2001. "Non‐Mandatory Approaches to Environmental Protection," Journal of Economic Surveys, Wiley Blackwell, vol. 15(3), pages 291-324, July.
    4. 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.
    5. 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.
    6. Iulie Aslaksen & Terje Synnestvedt, 2003. "Corporate environmental protection under uncertainty," Discussion Papers 355, Statistics Norway, Research Department.
    7. Solan, Eilon & Zhao, Chang, 2023. "When (not) to publicize inspection results," Journal of Economic Theory, Elsevier, vol. 210(C).
    8. Caplan, Arthur J., 2003. "Reputation and the control of pollution," Ecological Economics, Elsevier, vol. 47(2-3), pages 197-212, December.
    9. 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.
    10. 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.
    11. Duane Graddy & Thomas Strickland, 2007. "Public information as a deterrent to environmental infractions," Applied Economics, Taylor & Francis Journals, vol. 39(15), pages 1961-1972.
    12. 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.
    13. Iulie Aslaksen & Terje Synnestvedt, 2003. "Ethical investment and the incentives for corporate environmental protection and social responsibility," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 10(4), pages 212-223, December.
    14. 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.
    15. Dasgupta, Susmita, 1999. "Opportunities for improving environmental compliance in Mexico," Policy Research Working Paper Series 2245, The World Bank.
    16. 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.
    17. Wheeler, David, 2001. "Racing to the bottom : foreign investment and air pollution in developing countries," Policy Research Working Paper Series 2524, The World Bank.
    18. 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.
    19. 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.
    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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