Abstract: We study the effect of climate-related innovation on carbon emissions by analyzing supply chain networks. We find that climate innovation reduces carbon emissions at customer
firms, driven by product innovations. The effect is economically significant, dominated by
the most emission-intensive customer firms, gradually increases over a five-year horizon, and
is significant for Scope 1 and Scope 2 emissions. We analyze transmission mechanisms by
exploring customers’ choice of suppliers in reaction to climate patent announcements and
show that customers exhibit a strong preference for suppliers with climate innovations. We
find that climate patents also allow suppliers to attract new customers, especially customers
with high environmental ratings or a large carbon footprint. Using the quasi-random assignment of patent examiners and the exogenous technological obsolescence of climate patents as
instruments suggests a causal interpretation of the main findings.
Discussant: Alminas Zaldokas, National University of Singapore
Abstract: This study documents a positive and significant association between a firm’s use of climate-linked metrics in executive pay and its outsourced emissions to the supply chain. Using a sample of 870 listed U.S. firms, I find that firms with better internal corporate governance, better financial performance, and lower growth opportunities are more likely to use climate-linked pay. Such pay schemes are followed by an increase in upstream suppliers’ emissions, and a decrease in firms’ direct emissions. This effect is more pronounced among firms with greater climate pressure, greater bargaining power over suppliers, and lower external monitoring. To explore potential mechanisms, I show that firms with climate-linked pay facilitate emissions outsourcing by initiating (terminating) fewer (more) contracts with suppliers from regions with higher emissions costs. Overall, my findings highlight the potential impact of climate-linked metrics in executive compensation on the supply chain.
Abstract: The control of carbon emissions by policymakers poses the corporate challenge of developing an optimal carbon management policy. We provide a unified model that characterizes how firms should optimally manage emissions through production, green investment, and the trading of carbon credits. We show that carbon pricing reduces firms' emissions but also induces firms to tilt towards more immediate yet transient types of green investment---such as abatement as opposed to innovation---as it becomes costlier to comply. Green innovation subsidies mitigate this effect and complement carbon pricing in ensuring innovation-driven sustainability. Perhaps surprisingly, we show that carbon regulation need not reduce firm value.
Discussant: Adelina Barbalau, University of Alberta
