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Market responses to global governance: International climate cooperation and Europe's carbon trading

Published online by Cambridge University Press:  29 April 2020

Abstract

International environmental cooperation can impose significant costs on private firms. Yet, in recent years some companies have been supportive of international climate agreements. This suggests that under certain conditions environmental accords can be profitable. In this paper, I seek to explain this puzzle by focusing on the interaction between domestic regulation and decisions at international climate negotiations. I argue that global climate cooperation hurts the profits of polluting firms if domestic governments do not shield them from international compliance costs. Vice versa, if firms are subject to protective (i.e., insufficiently severe) policy instruments at home, firms can materially gain from international climate agreements that sustain expectations about their profitability. I test the argument with an event study of the effect of decisions at the UN Framework Convention on Climate Change (UNFCCC) on major European firms that received free carbon permits in the early stages of the European Union Emission Trading Scheme (EU ETS). The analysis suggests that financial markets carefully follow the international climate negotiations, and reward the regulated firms based on the outcome of UNFCCC decisions. The evidence also indicates the advantageous interplay between certain types of domestic regulations and international regimes for business. More generally, the results show the perils of privately supported policy for the effectiveness of international public good provision.

Type
Research Article
Copyright
Copyright © V.K. Aggarwal 2020 and published under exclusive license to Cambridge University Press

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Footnotes

I thank Patrick Bayer, Thomas Bernauer, Jeff Colgan, Jessica Green, Alexandru Grigorescu, Katja Michaelowa, Stefan Renckens, Christina Schneider, Detlef Sprinz, Matt Winters, and two anonymous reviewers for constructive comments. I also thank Thibaud Henin and Georg Zachmann for advice on the EU firms’ data, Endre Tvinnereim for help with the survey data, and Winifred Michael for great research assistance. Previous versions of this paper were presented at ISA 2014, PEIO 2015, MPSA 2015, SPSA 2016, and Virtual IPES 2017 meetings.

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