by Michael Greenstone, Christian Leuz, and Patricia Breuer

The U.S. Securities and Exchange Commission (SEC) recently proposed a rule that would mandate that public companies report their greenhouse gas (GHG) emissions. This follows similar efforts in the EU and UK. One rationale is that disclosure will provide information on material risks to investors making it evident which firms are most exposed to future climate policies. In addition, some believe that reporting will galvanize pressure from companies’ key stakeholders (e.g., customers and employees) leading them to voluntarily reduce their emissions. This reasoning is in line with evidence for financial markets (1) and disclosure mandates forming the third wave of environmental policy, following a wave of direct regulation and a wave of market-based approaches (2). But what might such disclosure reveal? We provide a first-cut preview of what we might learn about the climate damages caused by each company’s GHG emissions, drawing on one of the largest global data sets covering roughly 15,000 public companies.

This paper introduces “corporate carbon damages” as a measure of the total costs to society associated with corporate emissions. For each firm, it is calculated as the product of their CO2-equivalent direct emissions and the social cost of carbon (SCC) – the monetary value of the damages associated with the release of an additional ton of CO2. To account for differences in firm size and facilitate across-firm comparisons, we then divide this product by the respective firm’s operating profit or sales. With existing data sets, it is not possible to determine who bears the costs or to divide responsibility for these damages between firms and consumers (3). We nevertheless refer to them as corporate carbon damages because the emissions come from firm activities. The core finding is that average corporate carbon damages are large, but they vary greatly across firms within an industry, across industries, and across countries.

We argue that widespread mandatory disclosure is critical for confronting the climate challenge for several reasons. Perhaps most importantly, reliable measurement of GHG emissions is the foundation of any meaningful policy to restrict emissions. Additionally, knowledge of the heterogeneity in corporate carbon damages is critical to tackling the distributional and related political economy considerations due to which climate policies frequently founder. Finally, making heterogeneity in corporate emissions transparent can facilitate across-firm benchmarking by various stakeholders, which could become an important force driving continued reductions in corporate emissions.

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