Science-Based Carbon Emissions Targets

Abstract

We examine the effect of voluntarily adopting a standard for setting science-based carbon emissions targets on target difficulty and investments to achieve those targets. We find that firms with a track record of setting and achieving ambitious carbon targets are more likely to set science-based targets. Firms are also more likely to set science-based targets if they perceive climate change-related risks and have carbon-intensive operations. Using a difference-in-differences research design that compares the science and non-science targets of a firm, we find that targets become more difficult when firms adopt the science-based standard for the target, consistent with the standard increasing target difficulty and inconsistent with firms relabeling their existing targets. The increase in target difficulty is accompanied by more investment in carbon-reduction projects and higher expected emissions and monetary savings from these projects. Given that the science-based standard is determined externally of the adopting organization, our results suggest that external standards for target setting could have both target and investment effects.