Carbon Taxes and ESG Compensation

Rainer Niemann and Anna Rohlfing-Bastian

No 12582, CESifo Working Paper Series from CESifo

Abstract: This paper analyzes how ESG-linked executive compensation interacts with carbon taxation in a multitask principal-agent framework. A risk-neutral principal with financial and environmental preferences incentivizes a risk-averse manager to exert productive and abatement effort while facing an exogenous carbon tax on emissions. We show that, in the absence of ESG incentives, carbon taxes reduce emissions mainly by lowering production. In contrast, ESG-linked compensation shifts emission reductions toward increased abatement, allowing the principal to raise expected payoff while simultaneously reducing emissions, both with and without carbon taxation. However, carbon taxes narrow the range of feasible ESG preferences and, at high levels, may induce excessive abatement, potentially leading to negative net emissions. Our results highlight the importance of aligning internal incentive design with external climate regulation. The interplay of ESG compensation and carbon taxes should also be considered from a regulatory perspective.

Keywords: ESG-linked executive compensation; carbon taxation; environmental regulation; climate policy; managerial incentives (search for similar items in EconPapers)
JEL-codes: D82 H25 M52 Q54 Q58 (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ifo.de/DocDL/cesifo1_wp12582_0.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12582

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().