No. 133: Disclosure of Greenhouse Gas Emissions

Abstract

Recently, regulators worldwide required or proposed to require firms to disclose their emission information. To better evaluate the potential effects and the efficacy of such man- dates, I propose an analytical model to investigate firms’ emission investment and disclosure decisions. In the model, two firms engage in Cournot competition in a market where cus- tomers may dislike emissions associated with the products. Disclosing the emission intensity level not only indicates the firm’s environmental performance but also reveals how firms ex- ploit the environment in their production process. The results show the potential existence of different disclosure equilibria, which implies different disclosure patterns in different in- dustries. Nondisclosure is not an unambiguous signal for high emissions. Furthermore, conducting and revealing emission-abatement investment changes firms’ disclosure decisions regarding their emission level. Because of this effect, firms consider subsequent disclosure strategies when making investment decisions. I further identify that disclosure mandates may have an adverse effect on firms’ abatement incentives and even their total emissions.