Abstract
This paper develops theory suggesting that, relative to purely domestic firms, multinational enterprises (MNE) have greater incentives and strategic and operational means to respond to expanding carbon emissions constraints. We test our resulting hypotheses with data on changes in carbon emissions by over 6,000 industrial plants during Phase 2 (2008–2012) of the European Union’s Emissions Trading Scheme. We find that MNE maintain: (1) consistent carbon reductions across institutional contexts, and (2) an overall carbon performance edge over domestic firms. The carbon performance gap between MNEs and domestic firms narrowed, however, in host countries transitioning towards more stringent market regulatory systems. By demonstrating that the effects of national and international carbon regulations on firm behavior interact in important ways with each other and with firm characteristics, this paper deepens understanding of how institutions are likely to shape the ongoing energy transition towards a low-carbon economy.
Highlights
There is broad consensus around the need for economies and industries to leave behind traditional reliance on greenhouse gas– intensive fossil fuel combustion in favor of more climate-friendly energy resources
After developing a set of underlying conceptual considerations, we explore empirically how multinational enterprises (MNE) differ from domestic firms in their responses to two important international regulatory initiatives aimed at incentivizing reduced industrial CO2 emissions within the European Union (EU): (1) emissions trading schemes (ETSs), and (2) carbon tax schemes (CTSs)
Consistent with this prediction, our analysis indicates that – after one controls for industry and country factors – the carbon emissions of plants associated with MNE parents did on average, fall more than did emissions of plants owned by domestic only firms during Phase 2 of the EU Emissions Trading Scheme (EU ETS) (2008 to 2012)
Summary
There is broad consensus around the need for economies and industries to leave behind traditional reliance on greenhouse gas– intensive fossil fuel combustion in favor of more climate-friendly energy resources. MNEs are more positively framed as central to efforts to reduce environmental harm (Crooks, 2018; Milman, 2017; Ryle, 2016), because developing innovative ‘‘green’’ products and processes results in firm-specific advantages (FSAs) that they can market globally (Rugman & Verbeke, 2001). The latter scenario is especially likely for MNEs with subsidiaries in host countries with relatively strict environmental regulations (Attig, Boubakri, El Ghoul, & Guedhami, 2016; Porter, 1990a, b; Porter & Van der Linde, 1995). A successful ETS requires setting a binding emissions cap that leads to a sufficiently high carbon price, enough liquidity in the market, and transparent market mechanisms (Ellerman et al, 2010)
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