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Dynamic carbon emission management

Author

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  • Bustamante, Maria Cecilia
  • Zucchi, Francesca

Abstract

The control of carbon emissions by policymakers poses the corporate challenge of developing an optimal carbon management policy. We provide a unified model that characterizes how firms should optimally manage emissions through production, green investment, and the trading of carbon credits. We show that carbon pricing reduces firms’ emissions but also induces firms to tilt towards more immediate yet transient types of green investment—such as abatement as opposed to innovation—as it becomes costlier to comply. Green innovation subsidies mitigate this effect and complement carbon pricing in ensuring innovation-driven sustainability. Perhaps surprisingly, we show that carbon regulation need not reduce firm value. JEL Classification: G30, G31, G12, D62, O33

Suggested Citation

  • Bustamante, Maria Cecilia & Zucchi, Francesca, 2024. "Dynamic carbon emission management," Working Paper Series 2885, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242885
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    References listed on IDEAS

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    More about this item

    Keywords

    carbon abatement; carbon emissions; Carbon pricing; green innovation; sustainability;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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