Voluntary disclosure and investment in environmental technology

I examine the role of voluntary disclosure programs in creating market incentives for competing firms to invest in environmentally cleaner technology. In an industry subject to environmental regulation (such as emission taxes), such programs may allow firms to credibly disclose their progress in achieving compliance cost reduction through investments in internal R&D, innovation and learning (whose outcomes are uncertain and unlikely to be publicly observable). Specifically, I analyze a duopoly where firms are subject to an emission tax and invest in reducing the emission intensity of their production processes; the outcome of the investment is private information. I show that the ex ante incentive to invest is always higher in the presence of the voluntary disclosure program than without it; in particular, the opportunity to credibly disclose progress in cost reduction allows a successful firm to convey its true position of competitive advantage to the rival firm and realize higher market share and profit. Thus, voluntary disclosure programs increase the efficacy of traditional forms of environmental regulation in creating incentives for green technological change (even when buyers have no preference for greener technology). I show that such programs generally increase social welfare.