Abatement Investment Research Articles

Bayesian Vector Autoregression Analysis of Chinese Coal-Fired Thermal Power Plants

Considering the dataset of information related to Chinese coal-fired thermal power plants during the 2005–2017 period, we initially investigated the orthogonalized response of the carbon emission to energy consumption and power generation by using Bayesian vector autoregressions and feedback solutions for impulse control technology. The results showed that the effects of energy consumption and power generation on carbon emissions were significant. The Chinese government has launched a program aimed at curbing carbon emission peaks and neutralizing or decreasing carbon emissions. The causal relationship concludes that China still needs further investment in emission abatement, improvement related to the level of openness to the outside world, and the strengthening of the construction of green zones for industrial transfer to mitigate carbon emissions.

Imports and the CO2 emissions of firms

We explore how importing of intermediate goods affects the carbon intensity of firms in the Swedish manufacturing sector. By exploiting exogenous shocks to foreign export supply of intermediate goods, we estimate that a 10 percent increase in imports causes a 5.6 percent reduction in carbon intensity. Average carbon intensity among the firms in our sample between 2004 and 2016 decreased by around 50 percent, and our results suggest that import growth accounted for about a third of this decline. Exploring the mechanisms, we find evidence for both a technique effect and a product composition effect. Importing has a positive impact on productivity, scale of production, and abatement investments. It also encourages firms to focus more on their core products. We find no evidence for a pollution haven effect.

Firm's position in global value chains and its impact on pollutant emissions: Evidence from Chinese manufacturing firms

This paper studies examines how a firm's position in the global value chain affects its pollutant emissions. This paper integrates China's firm-level trade data into China's multi-regional input-output tables to provide an index to measure a firm's position in global value chains. Based on a firm-level pollution dataset (2000–2014) in China, this paper conducts an empirical analysis and find that the most-downstream firms on the global value chain have lower pollutant emission intensity. Our results also suggest that the production factor structure effect, the knowledge absorption effect and the abatement investment effect together contribute to the emission intensity gap between the most-upstream firms and the most-downstream firms. These novel results are significant in guiding firms towards reducing their emissions and promoting a green global value chain, with the ultimate goal of achieving multinational environmental protection.

Environmental regulation under sequential competition

We examine a polluting industry, competing à la Stackelberg, facing emission fees. We evaluate the leader's output advantage, disentangling two effects: the first-mover and cost advantage. We show that environmental regulation decreases the leader's output advantage; a reduction that is emphasized when pollution is more severe, but ameliorated by the leader's cost efficiency. We also measure the fee and welfare inefficiency arising if the regulator incorrectly assumes that the industry competes simultaneously, identifying in which settings this inefficiency is the largest. Our extensions consider investment in abatement, several leaders and followers, firm-specific emission fees, differentiated products, and a follower's cost advantage.

Asset pricing and the carbon beta of externalities

Climate policy needs to set incentives for investors who face imperfect, distorted markets and large uncertainties about the costs and benefits of abatement. These investors decide on uncertain investments according to their expected return and risk (carbon beta). We study carbon pricing and financial incentives in a consumption-based asset pricing model distorted by technology spillovers and time-inconsistency. We find that both distortions reduce the equilibrium asset return and delay investment in abatement. However, their effect on the carbon beta and the risk premium for abatement can be decreasing (when innovation spillovers are not anticipated) or increasing (when climate policy is not credible). We show that the distortions can be overcome by modified carbon pricing by a regulator, or by financial incentives, implemented in our model by a long-term investment fund. The fund pays a subsidy to reduce technology costs or offers financial contracts to boost investment returns to complement the carbon price. The investment fund can thus pave the way for carbon pricing in later periods by preventing a capital misallocation that would be too expensive to correct, thus improving the feasibility of ambitious carbon pricing.

Role of risk aversion in operational decisions with remanufacturing under emissions price volatility

Previous studies have extensively investigated the optimal operational decisions for firms under emission trading scheme, assuming a constant emissions price. However, the volatility of the emissions price has always been ignored, leaving the resulting operational decisions unclear for risk-averse firms. In this paper, we examine the impacts of risk aversion in the presence of emissions price volatility. Specifically, we investigate a risk-averse firm that strives to reduce associated costs through emissions abatement under emissions price volatility. The firm sells both new and remanufactured products. To illustrate the role of risk aversion, we sequentially examine risk-neutral and risk-averse scenarios using the mean–variance criterion as the risk aversion measurement. Among other results, we demonstrate that the risk-averse firm has incentives not only to remanufacture all used products, but also to increase the remanufactured quantity under certain conditions. Surprisingly, we find that risk aversion may not always hinder investments in emissions reduction. Subsequently, we discuss how risk aversion influences consumers and the environment, using the life cycle analysis-based approach to model environmental impacts. The results indicate that as the degree of risk aversion increases, consumers are worse-off, and there is a constant conflict between economic and environmental objectives. Additionally, it is interesting to find that the emission abatement investment strategy does not necessarily improve environmental benefits.

Impact of Green Credit Incentives on Operational Decisions of Green Supply Chain

Financial incentives have been introduced to guide financial institutions to increase green credit allocation, strengthen environmental risk management, and enhance support for green and low-carbon development. This paper investigated the government’s support for the carbon-emission supply chain by implementing green credit incentives. Two financial incentives are explored: performance-based incentives and interest subsidies. We conduct game-theoretic models to examine the characteristics and effects of two financial incentives on the supply chain. Our results reveal that: (1) both incentives are effective in scaling up supply chain performance and stimulate investment in emission reduction, while the mechanism differs according to the direct beneficiaries; (2) performance-based incentives are more sensitive to environmental damage, while the optimal subsidy ratio is more sensitive to consumer green awareness, indicating that the bank has an instinctive aversion to the risks inherent in abatement investments; (3) it is optimal for the government to intervene in green credit financing activities when environmental advantages and costs and consumer green consciousness are recognized. Our conclusions suggest the government can determine financial incentives for green credit based on the stage of green transition development and the real, demanding requirements of transition goals.

Debt overhang and carbon emissions

PurposeThis study investigates the association between debt overhang and carbon emissions (both direct and indirect emissions) using a sample of US publicly listed firms.Design/methodology/approachThe study applies generalized least squares (GLS) regression analyses to a sample of 2,043 US firm-year observations over a period of 14 years from 2007 to 2020. The methods include contemporaneous effect, lagged effect, alternative measures of carbon emissions and debt overhang, intensive versus non-intensive analysis, channel analysis, firm fixed effects, change analysis, controlling for credit rating analysis, propensity score matching approach, instrumental variable analysis with industry and year fixed effect.FindingsThis study's findings reveal that the debt overhang problem increases carbon emissions. This finding holds when the authors use alternative measures of carbon emissions and debt overhang. The authors find that carbon abatement investment is a channel that is negatively impacted by debt overhang, which in turn increases carbon emissions. This study's results are robust for several endogeneity tests, including firm fixed effects, change analysis, propensity score matching approach and two-stage least squares (2SLS) instrumental variable analysis.Practical implicationsThe outcome of this research has policy implications for several stakeholders, including investors, firms, market participants and regulators. This study's findings offer insights for investors and firms, helping them allocate resources effectively and make financing decisions aimed at reducing carbon emissions. Regulators and policymakers can also use the findings to formulate policies that promote alternative sustainable finance practices.Originality/valueThe outcome of this research is likely to help firms develop their understanding of the debt overhang problem and undertake strategies that yield a significant amount of funding to invest in reducing carbon emissions.

Do investment tax incentives promote firm pollution abatement investment? Evidence from China’s value-added tax reform

Using the 2009 consumption-based value-added tax (VAT) reform in China as a quasi-natural experiment for investment tax incentives, we investigate the impact of investment tax incentives on firm pollution abatement investment via a difference-in-differences (DID) approach. We find that the investment tax incentives have significantly raised firm pollution abatement investment of the eligible firms over the ineligible firms by 21.7%. Moreover, the effect is more pronounced for firms with political connection and firms located in regions with stricter environment regulation and lower pollution abatement costs. Our mechanism shows that the motivations for tax deduction play an important role in increasing pollution abatement investment. We also find that VAT reform has a negative indirect impact on firm environmental fine and firm employments and has a positive impact on firm’s capital-labor ratio and labor productivity.

Green finance, loan commitment, and environmental corporate social responsibility in a differentiated duopoly

AbstractWe analyze the firms' strategic choice of financing mode in both Cournot and Bertrand competition with pollution externalities. We show that, if the environmental corporate social responsibility (ECSR) firm does not abate, loan commitment financing will be used for ongoing dirty production, and the optimal interest rate is decreasing in the firm's ECSR concerns. However, when the ECSR firm voluntarily chooses a one‐shot abatement‐technology investment, the optimal choice is spot‐market financing. Compared with the case without abatement investment, the firm's finance for the green investment yields higher net consumer surplus and welfare unless the market size is sufficiently small.

Optimal financing strategy and contract design of supply chain with yield uncertainty under cap-and-trade regulation

PurposeThe purpose of the study is to investigate the financing channels and carbon emission abatement preferences of supply chain members, and further examine the optimal contract design of the retailer.Design/methodology/approachThis paper develops a low-carbon supply chain composed of one retailer and one manufacturer, in which the retailer provides trade credit to the manufacturer. Considering the cap-and-trade regulation, the manufacturer with uncertain yield makes decision on whether to invest in emission abatement. There are bank loan and trade credit to finance production for the manufacturer and green credit to finance emission abatement investment. Meanwhile, the retailer may provide the manufacturer with three kinds of contracts to improve emission abatement efficiency, namely, revenue sharing, cost sharing or both sharing.FindingsThe results show that the retailer prefers to offer financing service at lower interest rate, but trade (and green) credit financing is always optimal for manufacturer and supply chain. The investment in emission abatement is value-added to all players. The sharing contracts offered by the retailer at lower sharing ratios can realize Pareto improvement of the system regardless of the financing scheme. However, comparing with the revenue or cost sharing contract, the existence of optimal sharing ratios makes the both sharing contract more favorable to the retailer.Practical implicationsThe findings provide guidance for the emission-dependent manufacturer in financing and emission abatement decisions, as well as recommendations for the retailer to offer loan service and sharing contract.Originality/valueThis paper integrates green credit into bank loan or trade credit to analyze the financing decision of the manufacturer with uncertain yield and further considers the influence of three kinds of sharing contracts introduced by the retailer on improving operational performance.

Opposite ethical views converge under the threat of catastrophic climate change

Climate policy is often described by economists as an intertemporal consumption trade-off: consume all you want today and face climate damages in the future, or sacrifice consumption today to implement costly climate policies that will bring future benefits through avoided climate damages. If one assumes enduring technological progress, a society that is more averse to intertemporal inequalities should postpone climate policies and let future, richer generations pay more. Growing evidence however suggests that the trade-off is more complex: abrupt, extreme, irreversible changes to the climate may cause discontinuities to socio-economic systems, possibly leading to a sharp decline of human population and consumption per capita. In this paper, we show that, when accounting for a very small risk of catastrophic climate change, it is optimal to pursue stringent climate policies to postpone the catastrophe. Our results conform with the well-known conclusion that tight carbon budgets are preferred when aversion towards inequalities between generations is low. However, by contrast with previous studies, we show that stringent policies are also optimal when inequality aversion is high. The non-monotonicity of the influence of inequality aversion is due to the fact that, for a given investment in abatement, a higher inequality aversion gives a smaller weight to avoided future non-catastrophic damages, but a larger weight to the catastrophic outcome. We also explore the role of population ethics, and show that the size of the optimal carbon budget decreases with the social preference for large populations, although this parameter plays almost no role at extreme levels of inequality aversion. Our result demonstrates that views from opposite sides of the ethical spectrum in terms of inequality aversion converge in terms of climate policy recommendations, warranting immediate climate action.

Have Industrial Robots Improved Pollution Reduction? A Theoretical Approach and Empirical Analysis

AbstractTo investigate whether industrial robots have improved the ecological environment, this study integrated the adoption of robot technology and pollution abatement into Melitz's heterogeneous firm model. This showed that using robots in production can lower firms' pollution intensity by increasing their abatement investments, and this reduction effect is greater for higher polluting firms and those subject to weaker local environmental regulations. These theoretical expectations were then confirmed through a series of empirical investigations based on Bartik instrument regressions, with multiple robustness checks as well as heterogeneity and mechanism analyses. This paper adds to the literature on the relationships between automation technologies and green transformation. It shows that in the pursuit of economic growth and environmental protection, it is necessary for policymakers to shift from pollution control to technical support for traditional manufacturing firms.

Digital Transformation, Green Innovation, and Pollution Abatement: Evidence from China

The advent of novel and potent digital technologies has substantially transformed ways enterprises undertake their production. How digital transformation will reshape the production model of enterprises and have an impact on pollution emissions is a crucial problem in existing research. In this paper, we construct a theoretical framework to illuminate the theoretical mechanism of firms employing digital technology to bring out pollution abatement effect. Using a series of firm-level datasets from China, this paper introduces fixed-effect specification to empirically examine the environmental effects triggered by digital transformation. We find a negative effect of digital transformation on firms’ pollution emissions. The results are robust when potential endogeneity and mismeasurement problems are controlled for. Factors related to green innovation and investments in pollution abatement are found to play an important role in shaping the nexus between digital transformation and firm-level pollution emissions. This paper provides supporting firm-level evidence for the pollution abatement effect of digital transformation, which is essential for accelerating the construction of the digital economy, promoting the synergistic effect of digital transformation and green development, and achieving a balanced development of economic growth and environmental governance.

Dynamic analysis of a low-carbon maritime supply chain considering government policies and social preferences

With the goal of achieving carbon peak and neutrality, the government and enterprises are trying their best to speed up the decarbonization process in the shipping industry. To analyze the long-term game behaviors of a port, a shipping company, and a forwarder under simultaneous effects of government policies and social preferences, this paper considers a three-echelon maritime supply chain with carbon abatement investment and low-carbon service investment (LCMSC). We focus on constructing a dynamic Stackelberg game model with heterogeneous expectations. Based on nonlinear dynamics theory, the dynamic evolution of the game and the influences of government policies, social preferences, and cost-sharing behaviors are investigated. The results indicate that: (1) Bifurcations and chaos caused by dynamic adjustment of the port and the shipping company will lead to the disorder of the pricing system and the effect of chaos on the development trend of expected profits and social welfare varies under different paths of the LCMSC system into chaos. (2) Government subsidies for carbon abatement technology not only significantly improve greenness and expected profits of all parties, but also improve the stability of the LCMSC system. The carbon emission quota for the port has nothing to do with LCMSC members' optimal strategy and the evolution of the LCMSC system's stability. However, it indirectly affects the decision strategy of multiple stakeholders through the variation of the carbon price. (3) Excessive fairness concerns and the port's risk-aversion awareness have negative impacts on greenness, social welfare and the system's stability, while high risk-aversion awareness of the shipping company and the forwarder play opposite roles. (4) The shipping company can promote a tripartite-wins situation for LCMSC and improve the stability of decision-making by appropriately sharing the carbon abatement cost of the port. This study expands the application scenario of nonlinear dynamics theory in the LCMSC. It also provides theoretical guides for the government to formulate policies to encourage the promotion of green shipping.

Analyst Coverage and Corporate Environmental Policies

Abstract Exploiting two quasi-natural experiments, we find that firms increase emissions of toxic pollution following decreases in analyst coverage. The effects are stronger for firms with low initial analyst coverage, poor corporate governance, and firms subject to less stringent monitoring by environmental regulators. Decreases in environmental-related questions raised in conference calls, an increased cost of monitoring to institutional shareholders, reductions in pollution abatement investment, and the weakening of internal governance related to environmental performance are channels through which reduced analyst coverage contributes to increases in firm pollution. Our study highlights the monitoring role analysts play in shaping corporate environmental policies.

Deterioration or improvement? Intermediate product import and enterprises' environmental performance

As an important link in Global Value Chain, intermediate product import is a key method to connect domestic market and foreign market. It can improve country's competitiveness and reduce country's total emissions through import substitution effect. However, the essence of this process is just the transfer of pollution from one country to another. Does importing intermediate products really reduce country's emission intensity and improve its emission efficiency? The above question is significant in reality, but it is still pending at present. In view of this, our research constructs the micro trade model and uses data of Chinese enterprises to investigate causal impact of intermediate product import on emission intensity. We can learn that importing intermediates significantly reduces enterprises' emission intensity. Further analyses shows that rise in enterprises' abatement investment and increase in productivity after importing lead to reduction in emission intensity. This study examines the positive role of intermediate product import in improving emission efficiency from perspective of product trade, revealing importance of intermediate product import in country's economic development and pollution reduction.

Global firms and emissions: Investigating the dual channels of emissions abatement

This paper finds that both importing and exporting reduce firm-level emission intensities. We develop a theoretical model in which firms jointly determine the extent of abatement investment as well as whether or not to import intermediate inputs and export final goods. The model demonstrates a complementarity between trading decisions and abatement investment such that trading firms invest more in abatement technology and feature lower emission intensities. Using Chinese firm-level data, we estimate a theory-based regression model with instrument variables to account for the endogeneity issue associated with firms’ trading statuses. Our regression results show that both importing and exporting reduce firm-level emission intensities by over 15 percent.

Pollution Abatement Investment under Financial Frictions and Policy Uncertainty

Pollution Abatement Investment under Financial Frictions and Policy Uncertainty

Incentivizing environmental investments: The contest-based subsidy allocation mechanism

Governments often provide subsidies to incentivize investments that are considered important for the society. The question is how to distribute those subsidies in the most efficient way. This paper proposes two novel contest-based subsidy mechanisms and evaluates their effectiveness in terms of firms’ environmental investments, profits, consumer and producer surplus, environmental damage and social welfare. In the product green features (PGF) subsidy mechanism firms compete in terms of investment in product green features in order to obtain the highest amount of subsidy. In the CO2 abatement (ABA) subsidy mechanism firms compete in terms of investment in CO2 abatement in order to obtain the highest amount of subsidy. Among other results, we found that the PGF subsidy mechanism is more effective to promote investments in product green features and to increase consumer surplus. However, the ABA subsidy mechanism is found to be more effective in industries or technologies in which the level of emissions is relatively low. However, such environmental policies may lead to inflation, and may not always improve social welfare. This paper opens new avenues of research and thinking in terms of environmental subsidies and policy.