Climate regulation and emissions abatement: theory and evidence from firms’ disclosures

We measure firms’ beliefs about climate regulation, plans for future abatement, and current emissions mitigation from responses to the Carbon Disclosure Project. These measures vary strikingly around the Paris announcement. A dynamic model of a representative firm facing a future carbon levy, trading o↵abatement and capital growth, and facing convex adjustment costs cannot fit the data. A two-firm model with cross-firm reputational externalities, heterogeneous beliefs over climate regulation, and leader-follower interactions does. Out-of-sample, the model predicts firms’ reactions when the US exits the Paris agreement. Firms’ beliefs about climate regulation strongly a↵ects abatement, and cross-firm interactions amplify regulatory impacts