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Can capital markets create incentives for pollution control?

Author

Listed:
  • Lanoie, Paul
  • Laplante, Benoit
  • Roy, Maite

Abstract

After weighing the costs and benefits of pollution control, profit-maximizing firms sometimes choose not to invest in pollution abatement because the penalty they expect regulators to impose for noncompliance falls short of the cost of abatement. To improve incentives for pollution control, regulators have recently embarked on a strategy to release information to communities and markets (investors and consumers) about firms'environmental performance. Drawing on evidence from American and Canadian studies, the authors report that capital markets do react to the release of such information. The evidence suggests that heavy polluters are affected more significantly than minor polluters. And firms whose market values are hurt most by the release of this information are most likely to invest in pollution abatement. The firms'greater willingness to invest in pollution abatement seems to result from the regulators'willingness to undertake strong enforcement actions combined with the possibility of capital markets reacting to public ranking of firms in terms of their environmental performance.

Suggested Citation

  • Lanoie, Paul & Laplante, Benoit & Roy, Maite, 1997. "Can capital markets create incentives for pollution control?," Policy Research Working Paper Series 1753, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1753
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    Citations

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    Cited by:

    1. Caplan, Arthur J., 2003. "Reputation and the control of pollution," Ecological Economics, Elsevier, vol. 47(2-3), pages 197-212, December.
    2. Wheeler, David, 2001. "Racing to the bottom : foreign investment and air pollution in developing countries," Policy Research Working Paper Series 2524, The World Bank.
    3. Khanna, Madhu & Quimio, Wilma Rose H. & Bojilova, Dora, 1998. "Toxics Release Information: A Policy Tool for Environmental Protection," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 243-266, November.
    4. Dasgupta, Susmita & Hettige, Hemamala & Wheeler, David, 2000. "What Improves Environmental Compliance? Evidence from Mexican Industry," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 39-66, January.
    5. Iulie Aslaksen & Terje Synnestvedt, 2003. "Corporate environmental protection under uncertainty," Discussion Papers 355, Statistics Norway, Research Department.
    6. Amarnath Ananthanarayanan, 1998. "Is There A Green Link A Panel Data Value Event Study Of The Relationship Between Capital Markets And Toxic Releases," Departmental Working Papers 199818, Rutgers University, Department of Economics.
    7. Dasgupta, Susmita, 1999. "Opportunities for improving environmental compliance in Mexico," Policy Research Working Paper Series 2245, The World Bank.
    8. Dasgupta, Susmita & Laplante, Benoit & Mamingi, Nlandu, 1998. "Capital markets responses to environmental performance in developing countries," Policy Research Working Paper Series 1909, The World Bank.

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