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

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

Tarun Ramadorai, Federica Zeni

Series number :

Serial Number: 
730/2021

Date posted :

February 13 2021

Last revised :

February 19 2021
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Keywords

  • climate change • 
  • climate regulation • 
  • Carbon Emissions • 
  • dynamic models • 
  • Information Asymmetry • 
  • Reputation • 
  • abatement

We construct measures of firms' beliefs about climate regulation, plans for future abatement, and current emissions mitigation from responses to the Carbon Disclosure Project. These measures vary in a pronounced, distinctive fashion around the Paris announcement.

A dynamic model of a representative firm exposed to a future carbon levy, trading-off mitigation against capital growth, facing convex abatement adjustment costs does not fit the data; but a two-firm model with cross-firm information asymmetry and reputational externalities does. Out-of-sample, the model predicts reversals following the US exit from the Paris agreement. We conclude that abatement is strongly affected by firms' beliefs about climate regulation, and cross-firm interactions amplify the impact of regulation.

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Authors

Real name:
Federica Zeni