Emissions permit allocation and strategic firm behavior: Evidence from the oil sector in the European Union emissions trading scheme

Abstract

With the growing urgency of climate change, governments around the world are increasingly implementing new regulations for greenhouse gases. This trend elevates the importance of examining how firms engage in strategic efforts to influence regulations before they are in place and how they respond once they are in effect (i.e., their ex‐ante and ex‐post strategic behavior). This paper examines the outcomes of such strategic efforts by multinational and domestic oil companies within the European Union emissions trading scheme. An analysis of a panel dataset of oil firms (2008–2012) shows that on average the outcome of ex‐ante strategies did not differ significantly between multinational companies (MNCs) and domestic firms. However, the findings indicate that among those firms that received positive net benefits from the new climate policy, domestic firms were able to maximize these benefits better than MNCs through their ex‐post strategies. In contrast, among the firms that faced net costs due to the policy, MNCs were able to minimize these costs better than domestic firms, ex‐post. This paper advances our understanding of whether and to what extent MNCs differ from domestic firms in their economic outcomes stemming from strategic behavior related to emissions trading. This question is especially pertinent for regulations related to climate change, which is one of humanity's grand challenges and has important consequences for our economic, social, and political systems.

Carbon management accounting and financial performance: Evidence from the European Union emission trading system

“…Regulated industries and companies often prefer flexible emissions trading to respond more strategically to those regulations. Where international emissions trading programmes are rapidly emerging but little explored, empirical knowledge about companies' strategic behaviour concerning these particular trading programmes is still limited, mainly due to the novelty of these programmes (Patnaik, 2020).…”

The Role of Multinational Enterprises in Achieving Sustainable Development Goals

“…For example, in the European Union (EU), where policymakers have been proactive and have pressured MNEs to address their pollution, value chain responsibilities, and recycling mechanisms, positive results have emerged. Not only has the overall impact on society been positive, but the competitiveness of the MNEs involved has also increased (Ghauri, Tasavori, & Zaefarian, 2014;Patnaik, 2020;Wood et al, 2021). A combination of MNE actions and regulatory pressures and incentives have thus brought amazingly positive results (Hsueh, 2019).…”

“…This paper argues that MNEs need to go beyond their mission to create value for their shareholders and embrace creating value for stakeholders in the wider society as it is not only investors and consumers who benefit/suffer from their strategies (Comyns, 2019;Patnaik, 2020). In this paper we analyze whether MNEs can play a role in achieving SDGS or not.…”

What merits greater scholarly attention in international business?

“…In their study of the European solar industry, Georgallis, Albino-Pimentel, and Kondratenko (2021) show how policymakers can positively impact MNE location decisions, thereby contributing to the shift towards renewable energy. Similarly, Patnaik (2020) shows that MNEs react differently than domestic firms to regulatory initiatives, and thus differ in the ways in which they are able to benefit from and mitigate the costs associated with emissions trading policies. These studies illustrate research that is salient to multiple stakeholders, including firms, societies, and policymakers.…”