The Political Carbon Cycle

Democrats and Republicans strongly disagree about climate policy. This Article explains how these political disagreements have a surprisingly large effect on the greenhouse gas emissions of private-sector corporations. Combining a hand-collected dataset tracking the careers of U.S. state governors over two decades and a proprietary emissions database, I find that companies release more greenhouse gas emissions when their headquarter state has a Republican governor. To establish a causal connection between gubernatorial partisanship and corporate emissions, I analyze the effect of close elections. After a Republican replaces a Democratic governor in a closely contested election, which cannot be easily predicted in advance, companies headquartered in that state increase their greenhouse gas emissions. These empirical results are consistent with anecdotal evidence that companies face significantly more pressure from Democratic governors to adopt climate-friendly policies than from Republicans. Companies may increase carbon emissions during Republican rule because they anticipate that these governors are less likely to propose new climate regulations or enforce existing environmental laws.

The Article’s findings have three major legal and policy implications. First, it offers reason for skepticism about moving corporate law from maximizing shareholder wealth to giving managers the discretionary power to consider the welfare of stakeholders like workers and consumers. The political carbon cycle shows that managers may use the discretion in the stakeholder model to cater to the preferences of powerful politicians, rather than to safeguard the interests of vulnerable stakeholders. Second, the empirical analysis in this Article suggests that voluntary pledges by corporations to reduce pollution have limited effect. Elections have consequences for corporate emissions, and voluntary corporate actions may not suffice to reduce pollution as long as approximately half of state governors are skeptical about climate change mitigation. Thus, the findings raise questions about whether corporate social responsibility (CSR) is an effective substitute for a broader political consensus on climate change mitigation. Finally, this Article provides a novel justification for mandatory corporate disclosure of greenhouse gas emissions. Investors, equipped with information about firms’ climate impact, will be able to push managers to become more prosocial and diminish the magnitude of the political carbon cycle, assuming that investors are willing and able to use that information.