One of the many crises the world faces today is the climate emergency. Greenhouse gas emissions are destabilizing the global climate, and mitigating this change requires ambitious economic plans to which polluters need to comply. The costs of implementing such policies will bear especially on private firms. Consequently, these are usually expected to fight back and lobby against climate policy coordination. So why is then that in recent years some companies have been supportive of international climate agreements? Is this behavior due to pretentious attitudes (the so-called `green-washing’ behavior)? Is it because of good-faith change among polluters? In this article I propose an alternate, more active hypothesis for why some high-pollution firms may be supportive of global climate action, focusing on the active role that firms have at diluting domestic policy and then ripping off actual material profits from this.

The argument goes as follows: global climate cooperation hurts the profits of polluting firms if domestic governments do not shield them from the costs of complying with international agreements. Vice versa, if firms are subject to insufficiently severe policy instruments at home, firms can materially gain from international climate agreements that sustain the lax domestic policy they are anchored to, and therefore their profitability. I take the case of European firms regulated by the Emission Trading Scheme (EU ETS) as my primary example of domestically regulation (i.e. protected) firms. Major European firms received free carbon permits in the early stages of the EU ETS policy, specifically between 2005 and 2008 (more stringency was imposed in more recent years). Around the same time, international climate negotiations at the United Nations focused heavily on the use and fungibility of international carbon credits. Against this background, I claim that United Nations climate negotiations that concluded with outcomes that sought to sustain the value of free international carbon credits in the existing EU ETS market would translate into “good news” for EU ETS investors – after all, these international credits constituted free money for EU ETS companies. I then expect this information coming from the UN would, in turn, trigger positive abnormal returns in the books of EU ETS-regulated firms, at least in those early years.

The empirical analyses presented in the paper support this argument and provide important food for thought for international political economy and environmental politics research. To readers interested in climate policy, this paper suggests that researchers should carefully look at how firms gain benefits and costs from international regulatory arrangements, and then, in turn, how those might affect the behavior of firms. To those interested in global governance more generally, this study provides new insights on the relations between industrial lobbies and international regulators and the synergies of international organizations and domestic politics. The paper suggests conditions under which private companies may be willing to support or oppose international public policy, and highlights how interests participating in domestic policy-making are able to extract gains from international rules that are favorable to their private interests, but potentially worse for the public.

Read the full article ‘Market responses to global governance: International climate cooperation and Europe’s carbon trading’ published in Business and Politics