In response to growing concern about the effects of climate change, different regions of the world have adopted mandatory greenhouse gas (GHG) disclosure rules, including Australia, the European Union, and the United Kingdom. Notably, the U.S. Securities and Exchange Commission (SEC) proposed an extensive climate reporting rule in 2022. The goal of these programs is frequently to inform stakeholders of the climate change-related risks faced by emitters. For example, the SEC’s proposed rule aims to inform investors.

Although the explicit intent is rarely to affect emissions, the law and economics literature highlights various cases (e.g., restaurant hygiene and mine safety) where disclosure rules have changed behavior. In a new paper, I study whether a mandatory disclosure rule in the United States – the Environmental Protection Agency’s (EPA) GHG Reporting Program – affects emissions.

The EPA’s reporting program was implemented in 2010, broadly for use in guiding potential future GHG policies. It requires thousands of U.S. facilities to report their yearly emissions by GHG and production activity. Disclosure frequently extends to the process or unit level (boiler, furnace, etc.). In its first year, the reporting program covered over 6,200 facilities that together emitted 3.2 billion tons of carbon dioxide equivalent, roughly half of total U.S. emissions.

My main finding is that U.S. facilities reduced their emissions 7.9 percent in the two years following disclosure of the reporting program’s data. Canadian facilities form the control group because they have much in common with U.S. facilities and have been disclosing their GHG emissions since 2004. For example, my tests compare the emissions of U.S. cement producers with those of Canadian cement producers in the same year, while controlling for impact of regional industry GDP, local energy-efficiency incentives, and the regional price of natural gas. I also show that emissions reductions were not achieved by simply curbing or offshoring economic activity. Further, newly reporting firms increased their capital expenditures, suggesting that facilities make investments to reduce GHG emissions.

Why does the reporting program lead to emissions reductions? I note that its disclosures are granular and arguably informative to facilities about their peers’ operations, perhaps raising a red flag that spurs emissions reductions. I call this benchmarking and provide four sets of evidence consistent with it. First, the dispersion of emissions across U.S. facilities in the same industry falls by 20-31 percent following disclosure. This is consistent with facilities’ emissions converging once benchmarking becomes easier through the availability of a common dataset. Second, a facility’s carbon intensity (emissions measured according to amount  of goods produced) relative to that of its peers predicts its subsequent emissions reduction. This is consistent with managers using disclosed data to assess whether their facilities are more or less carbon intensive than their peers’. Third, I classify some facilities as benchmarkers based on how much their owners search for their peers’ financial information. Benchmarkers have larger GHG emissions reductions relative to non-benchmarkers. Finally, I show that facilities in a peer group become more similar in the industrial processes they use after reporting program disclosure. Further, they end up sharing more (less) processes with their carbon light (carbon intense) peers.

I then consider the role of external pressure in motivating emissions reductions through benchmarking. The reporting program’s effects are stronger when facilities have climate-progressive senators, supporting the idea that facilities are attentive to the prospect of climate change-related legislation. Because constituents can seek to influence climate policy [see Gelles, 2022], I also consider the role of political connections forged through campaign contributions. The reporting program has a larger effect for facilities connected to their U.S. House representatives. This is consistent with these facilities being more concerned about legislation or strengthening their political connections by reporting emissions that reflect favorably upon their representatives. In comparison, I find no strong evidence of pressure from capital markets, customers, or the general public around the reporting program’s data. On this point, one should be mindful about my sample period, 2010 to 2013. In the years since, climate change has received considerably more attention, notably from investors, and it may well be that different external stakeholders now exert pressure using the reporting program’s data.

Lastly, I consider the change in emissions when facilities begin measuring their GHG output but before those data are publicly released. The act of measurement could itself drive change, or forward-looking facilities might anticipate a backlash when the data eventually become public and therefore act earlier. Inconsistent with these possibilities, I find no significant change in emissions when facilities first start measuring and reporting their emissions non-publicly to the EPA. These results underscore the importance of public disclosure in producing emissions reductions.

Takeaways

My study shows that GHG disclosure mandates can produce an important social benefit by reducing GHG emissions. I also highlight several points that may be informative for policy-makers interested in emissions reductions: i) benchmarking can play an important role in reducing emissions, and considering the GHG Reporting Program, this seems more likely when disclosed data are granular; ii) the prospect of climate legislation is a factor that facility managers likely consider when implementing emissions reductions; and iii) measurement and non-public reporting to the regulator alone might not affect emissions.

The SEC’s proposed climate disclosure rule requires firm-level (Scope 1) GHG emissions disclosures and not facility or unit-level disclosures such as in the EPA’s reporting program. Thus, it is unclear whether the SEC’s proposed rule, if implemented, will lead to similar emissions reductions because the opportunities for peer-benchmarking could be more limited. Yet, Christensen et al. (2017) show that when firm-level information about mine safety violations is presented in the annual report (10-K), there is a decreased incidence of mine-safety violations. Their results are consistent with increased investor scrutiny. Therefore, the SEC’s proposed rule could nevertheless lead to emissions reductions through different paths than the ones my study highlights.

ENDNOTES

Christensen, H. B., Floyd, E., Liu, L. Y., & Maffett, M. (2017). The real effects of mandated information on social responsibility in financial reports: Evidence from mine-safety records. Journal of Accounting and Economics, 64(2-3), 284-304.

Gelles, D. (2022). How Republicans are ‘weaponizing’ public office against climate action. New York Times, August 5, 2022.

This post comes to us from Professor Sorabh Tomar at Southern Methodist University. It is based on his recent article, “Greenhouse Gas Disclosure and Emissions Benchmarking,” available here.