Firms' reduction of greenhouse gas emissions and economic performance : analyzing effects through demand and productivity

Abstract

This paper analyzes how a firm fs reduction of its greenhouse gas (GHG) emissions affects its economic performance. The theoretical model used is derived from the Cobb-Douglas production function and the inverse demand function, and predicts that in reducing its GHG emissions, a firm will increase its value added because it promotes an increase in demand for its output and improves its productivity. The estimation results, using data on Japanese manufacturing firms, suggest that the reduction of GHG emissions increases a firm fs economic performance only through an increase in demand. Thus, firms can improve their overall economic performance because increased demand accompanies their reduction of GHG emissions, even if they cannot achieve this through an improvement in productivity, as estimates here support the traditional view that reducing GHG emissions imposes additional costs on firms.