Market responses to global governance: International climate cooperation and Europe's carbon trading

Abstract

International environmental cooperation can impose significant costs on private firms. Yet, in recent years some companies have been supportive of international climate agreements. This suggests that under certain conditions environmental accords can be profitable. In this paper, I seek to explain this puzzle by focusing on the interaction between domestic regulation and decisions at international climate negotiations. I argue that global climate cooperation hurts the profits of polluting firms if domestic governments do not shield them from international compliance costs. Vice versa, if firms are subject to protective (i.e., insufficiently severe) policy instruments at home, firms can materially gain from international climate agreements that sustain expectations about their profitability. I test the argument with an event study of the effect of decisions at the UN Framework Convention on Climate Change (UNFCCC) on major European firms that received free carbon permits in the early stages of the European Union Emission Trading Scheme (EU ETS). The analysis suggests that financial markets carefully follow the international climate negotiations, and reward the regulated firms based on the outcome of UNFCCC decisions. The evidence also indicates the advantageous interplay between certain types of domestic regulations and international regimes for business. More generally, the results show the perils of privately supported policy for the effectiveness of international public good provision.

Global Firms and Global Sheriffs? Why Territory Matters for Extraterritorial Enforcement of Regulatory Regimes

“…The literature posits two key problems are in the way of effective regime enforcement. First, although regulatory regimes do not necessarily penalize companies (Crippa, 2021), transnational firms can fragment ownership structures and supply chains across borders to evade regulations (Arel-Bundock, 2017;Chapman et al, 2020;Fisman et al, 2008) or to profit from the conditions they create (Genovese, 2020;Thrall, 2021). Second, self-interested states can defect from their obligations to prosecute foreign corporate crime by their nationals, if they do not bear its negative externalities 7 (Eilstrup- Sangiovanni and Sharman, 2019;Hafner-Burton and Schneider, 2019).…”

“…Examples include anti-trust, taxation, environmental agreements, labor and human rights protection, criminalization of money laundering, and anti-bribery. Global firms often fragment their ownership structure across borders to evade regulations (Arel-Bundock, 2017;Chapman et al, 2020) or exploit advantageous conditions they create (Genovese, 2020;Thrall, 2021). This begs the question: are states condemned to be helpless in face of such regulatory arbitrage?…”

The Political Economy of Financial Markets

“…He highlights that these interventions are successful only at horizons of up to three months. Genovese (2015) finds that decisions of the UN Framework Convention on Climate Change affected the stock returns of 38 major European firms whose carbon emissions were regulated by this framework.…”

Carbon trading behavior of power generation enterprises based on causal inference

“…Carbon dioxide is the main component of greenhouse gases, so the greenhouse gas emissions trading is mainly based on carbon dioxide emissions, with tons as the unit, mainly for high-emission enterprises, a kind of market restraint behavior. According to the benchmark of each industry and the annual emission index of historical emission allocation, the excess part needs to purchase the surplus emissions of other enterprises in the carbon emission trading market to force enterprises to take the initiative to save energy and reduce emissions [1].…”