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Maria Cecilia Bustamante

10 January 2024
WORKING PAPER SERIES - No. 2885
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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 Code
G30 : Financial Economics→Corporate Finance and Governance→General
G31 : Financial Economics→Corporate Finance and Governance→Capital Budgeting, Fixed Investment and Inventory Studies, Capacity
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
D62 : Microeconomics→Welfare Economics→Externalities
O33 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Technological Change: Choices and Consequences, Diffusion Processes
1 August 2023
WORKING PAPER SERIES - No. 2835
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Abstract
We develop a model to examine how discount rates affect the nature and composition of innovation within an industry. Challenging conventional wisdom, we show that higher discount rates do not discourage firm innovation when accounting for the industry equilibrium. Higher discount rates deter fresh entry—effectively acting as entry barriers—but encourage innovation through the intensive margin, which can lead to a higher industry innovation rate on net. Simultaneously, high discount rates foster explorative over exploitative innovation. The model rationalizes observed patterns of innovation cyclicality, and predicts that lower entry in downturns hedges innovating incumbents against higher discount rates.
JEL Code
G31 : Financial Economics→Corporate Finance and Governance→Capital Budgeting, Fixed Investment and Inventory Studies, Capacity
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
O31 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Innovation and Invention: Processes and Incentives
17 July 2023
RESEARCH BULLETIN - No. 109
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Abstract
Regulation to control carbon emissions challenges firms to develop optimal carbon management policies. We set out a unified approach to study the trade-offs carbon pricing poses for firms and how they should therefore best respond. Our model shows that while carbon pricing curtails firms’ carbon emissions, polluting firms tilt their green investment mix towards more immediate yet short-lived options – such as solely reducing emissions (abatement) instead of investing in green innovation – as it becomes costlier to comply. Under emissions trading systems, larger balances of carbon credits dampen firms’ efforts to reduce their carbon emissions. Our analysis reveals that carbon regulation does not necessarily reduce shareholder value if firms are sufficiently committed to reducing their carbon footprint.
JEL Code
G30 : Financial Economics→Corporate Finance and Governance→General
G31 : Financial Economics→Corporate Finance and Governance→Capital Budgeting, Fixed Investment and Inventory Studies, Capacity
O30 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→General
D62 : Microeconomics→Welfare Economics→Externalities