The impact of political risks on carbon emissions

Abstract

We investigate the impact of firm-level political risks on carbon emissions. Our results show that companies decrease their total emission footprint in response to higher political risks. However, this is driven predominantly by the reduction of scope 2 emissions, which “involves purchased energy consumed by the firm.” With increasing policymakers, investors, and stakeholders' emphasis on positive climate change actions, our findings indicate that corporations may view reducing carbon emissions as an efficient strategy to draw attention away from higher political risks. Further analyses reveal that this tactic is adopted mainly by resource-constrained companies that are smaller, underperforming, with lower cash reserves and cashflow from operations. Using a channel test, we also provide empirical evidence that reducing scope 2 emissions in response to higher political risks may have helped firms avoid lower market valuation. Our findings are robust to a series of sensitivity and endogeneity checks. Overall, this study advances the literature by highlighting the interplay between politics and carbon emission in an increasingly climate change-focused environment.