The U.S. Securities and Exchange Commission (SEC) is finalizing a climate disclosure rule this fall that would require companies to report their greenhouse gas emissions. The rule, which has received pushback in the U.S., follows on similar reporting requirements enacted recently in the European Union and United Kingdom. What might such disclosure reveal, and how would it help? A new study quantifies the damages from corporations’ emissions and discusses how public disclosure could lead to lower emissions due to the responses of consumers, other key stakeholders, and firms to this information.

“Disclosure of emissions data is vital to holding firms accountable for their emissions,” says co-author Christian Leuz, the Charles F. Pohl Distinguished Service Professor of Accounting and Finance at the University of Chicago’s Booth School of Business “The benefits of climate disclosure include unleashing data needed to build stronger climate policies, providing financial markets the data necessary to better price emissions, and the potential for stimulating voluntary reductions.”

The study considers roughly 15,000 publicly traded firms worldwide and measures the costs to society associated with emissions from their activities—or their “corporate carbon damages.” Leuz and his co-authors Michael Greenstone, also from the University of Chicago, and Patricia Breuer find that average corporate carbon damages are large, equaling about 44 percent of firms’ operating profits. The authors emphasize that it is not possible to divide responsibility for these damages between the firms that make the products and consumers who buy them, but nevertheless refer to them as corporate carbon damages because the emissions come from production.

“A key finding is that carbon damages per dollar of profits vary greatly across countries, across industries, and even across firms within a given industry,” says Greenstone, the Milton Friedman Distinguished Service Professor in Economics and director of the Energy Policy Institute at the University of Chicago (EPIC). “This suggests that mandatory disclosure could trigger high emitters, either on their own accord or due to consumer pressure, to reduce emission to match cleaner competitors.”

In fact, the researchers estimate the reduction in emissions if all firms with carbon damages per dollar of profit above their industry’s median were to reduce to their respective industry median. They find that bringing the damages down to the median would reduce emissions by 70 percent.

Corporate climate damages also vary widely from country to country. The countries with the highest average carbon damages as a percentage of firm profits are Russia (129.6 percent), Indonesia (89.6 percent), and India (78.8 percent).  The countries with the lowest are the United Kingdom (21.7 percent), United States (25.7 percent), and France (29.5 percent).

“Bringing transparency to the damages from firms’ emissions could galvanize pressure from stakeholders and help inform policy and markets,” says Patricia Breuer, of the Collaborative Research Center TRR 266 Accounting for Transparency, who recently completed her PhD at the Graduate School of Economic and Social Sciences (GESS) at University of Mannheim and will join Erasmus University Rotterdam as assistant professor in September. “But importantly, it would also allow firms and their shareholders and customers to see how they stack up against competitors and think more strategically about their emissions and the toll they are having.”

Areas of Focus: Energy Markets
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Fossil Fuels
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Climate Change
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Climate Change
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Climate Economics
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Climate Economics
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