Emission permits and firms' environmental responsibility

This paper examines the interplay between firms' choices regarding Environmental Corporate Social Responsibility (ECSR) activities and the implementation of an emission trading system (ETS) within an oligopoly industry. We determine the equilibrium and stability conditions of an endogenous industry configuration where profit-seeking (PS) and ECSR firms coexist in the presence of an ETS policy. We derive some testable findings: first, the ECSR strategy is favoured by the increase in consumers' environmental concern, irrespective of any policy implementation. Second, the number of ECSR firms increases with the implementation of the ETS policy, provided that the number of allowances is sufficiently high. Finally, the number of ECSR firms decreases with the stringency of the ETS policy. We test the theoretical findings with a longitudinal dataset spanning the years 2002-2021, by evaluating how the number of ECSR firms in several industries and countries is affected by the introduction of the ``EU ETS scheme'' in 2005. Our empirical results are consistent with what is expected from the theory.