Determinants of internal carbon pricing and of corporate climate change strategy

Abstract

The adoption of carbon pricing instruments has increased significantly in recent years. The World Bank (2016) estimates that carbon pricing mechanisms have been implemented by countries which collectively represent a quarter of the world’s total greenhouse gas (GHG) emissions in 2016—although carbon pricing only covered an half of the emissions in those economies. Still this percentage needs to expand in order to deliver on the long-term goals of the Paris Agreement (Aldy et al., 2016; du Pont, 2017). To reach this goal firms are expected to progressively internalize the social costs of carbon emissions (Popp et al., 2010; Kolstad et al., 2014; Nordhaus, 2014; Weitzman, 2016). In addition, equity markets, along with financial regulators, are increasingly calling companies to disclose the effects of climate change in order to show their exposure to global warming risks (Bianchini and Gianfrate, 2017).