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Reducing Emissions Helps Companies Stay Ahead

Researchers find policy and industry pressures motivate corporations to participate in the emissions market. Assess your company’s position in this market.

What drives corporations to participate in emissions trading?

In 2005, the EU began implementing its large-scale emission trading system. At the time, trading in the U.S. remained limited to the Chicago Climate Exchange in which a few MNCs were involved. It seemed increasingly likely that a North American cap-and-trade program would be developed.

A study by Jonatan Pinkse looks at what drives MNCs’ intentions to participate in emission trading and carbon offset projects.

Regulatory and Competitive Pressures

Energy industries (oil, gas, electric utilities) are more involved in emission trading than other industries. Chemical and pharmaceutical firms currently are least inclined to trade carbon emissions as their regulatory burden focuses on reducing toxic emissions. While European firms are subject to a cap, they are not ahead of firms in Asia or North America in their intention to participate in trading.

The main reasons why MNCs intend to participate in the emission market are:

  • Climate change policy: Proactive companies want to stay ahead of laws and regulation.

  • Industry pressure: Competition is leading to new products and processes that reduce emissions. Those who have made these investments are more likely intend to participate in trading.

Implications for Managers

Emissions trading and carbon offsets provide opportunities for companies to reduce emissions, stay ahead of competitors and prepare for climate change regulation. Multinational corporations (MNCs) are creating new products, improving production efficiency, and reducing or offsetting emissions through emission trading. To reduce uncertainty in a changing market, businesses need to adapt by lowering emissions of products and processes, and assessing their role as a buyer or seller.

For managers and analysts working in finance, assess what role your firm plays in emissions trading. Will it buy or sell credits?

For professionals in manufacturing, product development, innovation, strategy, or operations, the mandate is clear: create new products and improve production processes that cut emissions.

To reduce emissions, any professional can use environmental policy tools like the Clean Development Mechanism and Joint Implementation to provide guidance on how to reduce emissions.

Implications for Researchers

Pinkse analyzed responses from 136 of the top 500 largest MNCs using data from the Carbon Disclosure Project, a survey that evaluates firm strategy for dealing with carbon emissions. It examines the role of country of origin (North America, Europe or Asia), industry, and environmental strategy for emission trading. Company intentions to participate in emission trading and offset projects, process improvement, and product development were explored.

Future research could observe actual trading behaviour of companies as trading expands. It could also identify the impact of trading on the development of clean technologies.

Pinkse, Jonatan. (2007). Corporate Intentions to Participate in Emission Trading. Business Strategy and the Environment, 16: 12-25.

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