Can capital markets create incentives for pollution control?

Paul Lanoie, Benoit Laplante and Maite Roy

No 1753, Policy Research Working Paper Series from The World Bank

Abstract: After weighing the costs and benefits of pollution control, profit-maximizing firms sometimes choose not to invest in pollution abatement because the penalty they expect regulators to impose for noncompliance falls short of the cost of abatement. To improve incentives for pollution control, regulators have recently embarked on a strategy to release information to communities and markets (investors and consumers) about firms'environmental performance. Drawing on evidence from American and Canadian studies, the authors report that capital markets do react to the release of such information. The evidence suggests that heavy polluters are affected more significantly than minor polluters. And firms whose market values are hurt most by the release of this information are most likely to invest in pollution abatement. The firms'greater willingness to invest in pollution abatement seems to result from the regulators'willingness to undertake strong enforcement actions combined with the possibility of capital markets reacting to public ranking of firms in terms of their environmental performance.

Keywords: Labor Policies; Environmental Economics&Policies; Public Health Promotion; Water and Industry; Health Monitoring&Evaluation; Insurance&Risk Mitigation; Water and Industry; Health Monitoring&Evaluation; Health Economics&Finance; Environmental Economics&Policies (search for similar items in EconPapers)
Date: 1997-04-30
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Citations: View citations in EconPapers (21)

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