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Firms'and States'Responses to Laxer Environmental Standards

Author

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  • Cordella,Tito
  • Devarajan,Shantayanan

Abstract

On June 1, 2017, President Trump announced the United States'withdrawal from the Paris agreement on climate change. Despite this decision, American firms continued investing in low-carbon technologies and some states committed to tougher environmental standards. To understand this apparent paradox, this paper studies how a weakening of environmental standards affects the behavior of profit-maximizing firms. It finds that a relaxation of emission standards (i) may increase firms'incentives to adopt clean technologies, but not to pollute less; (ii) may negatively affect industry profitability if it is perceived as temporary; and, when this is the case, (iii) the unilateral adoption of stricter standards by large states may increase the expected profitability of every firm.

Suggested Citation

  • Cordella,Tito & Devarajan,Shantayanan, 2019. "Firms'and States'Responses to Laxer Environmental Standards," Policy Research Working Paper Series 8781, The World Bank.
    • Handle: RePEc:wbk:wbrwps:8781
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    Cited by:

    1. Yi Li & Lili Ding & Yongliang Yang, 2020. "Can the Introduction of an Environmental Target Assessment Policy Improve the TFP of Textile Enterprises? A Quasi-Natural Experiment Based on the Huai River Basin in China," Sustainability, MDPI, vol. 12(4), pages 1-19, February.
    2. Cordella, Tito & Devarajan, Shantayanan, 2019. "Firms' and states’ responses to laxer environmental standards," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    3. Kong, Dongmin & Ma, Guangyuan & Qin, Ni, 2022. "The political economy of firm emissions: Evidence from a quasi-natural experiment in China," European Journal of Political Economy, Elsevier, vol. 75(C).

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    Keywords

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    JEL classification:

    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare

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