Predominant Factors for Firms to Reduce Carbon Emissions

This paper intends to find the predominant factors for corporations to reduce their carbon emissions. In light of an in-depth literature review, various determinants have been assessed and compared according to their importance. Results show that carbon pricing schemes creating revenue which can be redistributed are the most effective governmental measures. Even though there are ways to circumvent these systems, such as moving operations, bribery or using bargaining power to adjust bills in the first place, a large majority of firms were found to adapt to new laws. The most significant reasons in the organisational domain are economic benefits arising mainly thanks to cost savings and risk mitigation of anticipated regulation as well as competition. Moreover, stakeholders play a key role in the decision-making process of firms. Especially market actors with direct influence on a company’s turnover, like consumers and investors, were observed to be able to exert great power on enterprises. By giving an insight into these factors, this paper helps to understand what can possibly spur urgently needed action for climate by corporations.

Table of Content

Abstract

Table of Content

List of Figures

List of Abbreviations

1 Introduction

2 Governmental Domain

2.1 Subsidies

2.2 Regulation

2.3 Carbon Pricing

2.4 Bargaining Power and Corruption

2.5 Pollution Haven Hypothesis

3 Organisational Domain

3.1 Business Ethics and Corporate Social Responsibility

3.2 Endogenous Factors

3.3 Economic Advantages

3.4 Risk Mitigation

3.5 Stakeholder Pressure

3.5.1 Types of stakeholders

3.5.2 Influence of Stakeholders

4 Conclusion and Discussion of Results

Bibliography

Scientific Journals

Data Sources

Figure Sources

List of Figures

Cumulative CO2 emissions by world region (relative)

Cumulative CO2 emissions by world region (absolute)

Power-Interest Matrix

List of Abbreviations

CO2 = Carbon Dioxide

CSA = Country-Specific Advantages

CSR = Corporate Social Responsibility

EOP = End-of-Pipe

ETS = Emissions Trading System

FDI = Foreign Direct Investment

FSA = Firm-Specific Advantages

GHG = Greenhouse gas

MNC = Multinational Corporation

MNE = Multinational Enterprise

NGO = Non-Governmental Organisation

TBL = Triple Bottom Line

tCO2 = Tons of Carbon Dioxide

tCO2e = Ton of Carbon Dioxide Equivalent

TQEM = Total Quality Environmental Management

1 Introduction

There is a wide consensus in science that greenhouse gas (GHG) emissions have to be limited. The severe effects of climate change are not only a danger to many plant and animal species but also to us humans. More frequent extreme weather events, rise of sea levels and loss of biodiversity can cause the destruction of people’s livelihoods as well as food shortages and severe economic risks (Elkins, Baker, 2001; Nippa et al., 2021; Bento, Gianfrate, 2020; Tvinnereim, Mehling, 2018). Most countries, thus, have agreed on the goal of net zero emissions until 2050 in order to avoid the worst effects of climate change. Some have already included their target in law or policy documents. Germany, Sweden and Portugal, for instance, have a law for carbon neutrality by 2045; Finland and Austria are examples for countries which have included their goal of net zero emissions by 2035 and 2040 respectively in official policy documents (Energy & Climate Intelligence Unit, 2021).

However, to reach this target, effort by many parties is required. Likewise, policies by governments are necessary in order to encourage individuals as well as business to consume, invest and produce more ecologically. For this reason, many countries have already implemented measures like subsidies for investments for companies and privates into renewable energy production, carbon neutral heating systems and ecological mobility (Nippa et al., 2021; Cadez et al., 2019). Scholars agree that carbon pricing models need to be adopted all around the world in order to reach the target of a maximal rise in global average temperature of 2° Celsius, which was defined in the Paris agreement in 2015 (Bento, Gianfrate, 2020; Cadez et al., 2019; Elkins, Baker, 2001; Tvinnereim, Mehling, 2018). That is why some nations and economic blocks, such as the EU, New Zealand and Canada, have already implemented emissions trading systems and others, like Sweden, Norway and Switzerland, carbon taxes. Many countries are currently discussing the implementation and expansion of similar schemes as it is becoming more and more obvious that otherwise their goals cannot be reached (The World Bank, 2021; Cadez et al., 2019).

Especially business plays an important role in reaching these targets, since long-term investments, for example, in production sites, power plants and infrastructure lock in carbon emissions for a long period of time and make a change in the future more difficult. If for instance, a firm now decides to invest in an expensive site using fossil fuels, it is unlikely to radically change its way of production any time soon (Todaro et al., 2021; Tvinnereim, Mehling, 2018). Furthermore, consumers depend on companies to offer them ecological products (Tvinnereim, Mehling, 2018). Additionally, corporations are by far the largest emitters of carbon dioxide (CO2). Even though shares differ among countries, worldwide about 70% of carbon emissions are caused by companies (Kumarasiri, 2017). Enterprises’ traditional goal to maximize shareholder value seems to undermine efforts to lower CO2 output. That’s why more and more governments seek to set economic incentives via subsidies for ecological behaviour and pricing of pollution to make business internalize the cost of carbon emissions (Nippa et al., 2021).

Therefore, this paper focuses on companies’ decisions concerning their carbon emissions to find out if maximizing shareholder value actually contradicts ecology and if governments’ efforts are effective. There are already many papers describing impacts of regulation and other governmental measures such as carbon pricing on the economy, foreign direct investment (FDI), imports, exports and most importantly the environment. There are also some studies assessing the importance of various reasons for a firm to invest in cleaner technology. However, in the context of mitigating CO2 emissions, most scholars are focusing on a specific policy’s effectiveness but few on comparing the factors influencing a corporation’s decision to lower their output. Consequently, the focus in this paper should lie on reasons for enterprises to take action in GHG emissions limitation and assess their importance which also represents the research gap intended to be filled.

The recent study by Nippa et al. (2021) about corporations’ responses to carbon pricing served as a starting point for the research to this literature review. The authors name various internal and external parameters affecting a firm’s choice to reduce carbon output. These are, for instance, the impact of stakeholder pressure, expected regulation, carbon pricing and economic benefits for companies but also retarding factors, like attempts to move operations to so-called pollution havens or their usage of bargaining power to negotiate laxer ruling (Nippa et al., 2021). While their main focus lies on business’ responses, this paper intends to answer the question:

What are the most important factors influencing a firm’s decision whether to reduce carbon emissions?

In order to assess existing studies on the topic and to answer the given research question, three research statements have been put up. The following three statements were evaluated in light of the existing research on companies’ decisions to limit their carbon emissions.

 Governmental measures, like subsidies, regulation and carbon pricing, make firms reduce their carbon emissions.

 Firms’ bargaining power, corruption and the pollution haven effect render governmental measures ineffective.

 Firms take voluntary action to reduce carbon emissions.

The statements were assessed by three stages of research. The first part consisted of a general search of literature in the field of reasons for corporations to behave ecologically or take action for the environment in general.

The second stage of the research included the assessment of determinants identified so far. As many of them are not addressing greenhouse gases specifically but are concerning other aspects of ecological behaviour, like recycling, eco-innovation, investments in sustainable technologies or pollution prevention, they had to be evaluated concerning their validity for the specific context of CO2 emissions reduction. Thus, further literature was reviewed in order to assure that identified factors would hold for the specific context.

The third stage then consisted of assessing whether identified factors were actually of importance. There is obviously a large number of possibly important influences; nevertheless, this paper should not and cannot talk about all of them but has to focus on the most influential ones among them. Some of the less significant factors are still mentioned, yet the focus lies on but a few decisive reasons for an enterprise to actually take action and not on parameters just affecting the firm’s capabilities or readiness to scale down its GHG emissions.

Finally, in the conclusion, the three predominant determinants carbon pricing, economic advantages and stakeholder pressure are discussed. Findings of this paper show that in the governmental domain carbon taxes and emissions trading systems are most decisive for companies. Apart from that risk mitigation, managing stakeholders’ interests and achievable profits thanks to investments in ecology represent the most influential reasons to reduce GHG output. Furthermore, indications, where additional, empirical research is needed, are given.