The Political Carbon Cycle

Democrats and Republicans strongly disagree about climate policy. How does this disagreement influence the greenhouse gas emissions of private-sector firms? In a recent paper, I argue that the political affiliation of U.S. state governors has a surprisingly large effect on the polluting activities of public companies. Combining a hand-collected dataset tracking the careers of U.S. state governors over two decades and a proprietary emissions database, I document the existence of a political cycle in the level of polluting activities by privately run U.S. firms, with corporations significantly increasing carbon emissions when their headquarter state has a Republican governor.

I find that the presence of a Republican governor in a firm’s headquarter state is associated with 7.5% greater greenhouse gas emissions directly attributable to the firm, and 7% larger total emissions (including indirect emissions from activities such as purchasing raw materials). This finding could be correlated with partisan differences in climate policies and enforcement. Democratic governors are more likely than their Republican counterparts to propose new laws and regulations to mitigate the effects of climate change. Democratic governors are also more likely to empower state agencies to aggressively enforce existing environmental regulations against companies responsible for pollution. These differences in climate policies between governors based on their partisan affiliation allow companies to release more greenhouse gases into the atmosphere without fear of government punishment when there is a Republican governor in their headquarter state. Conversely, when a Democrat inhabits the governor’s mansion, companies headquartered in that state may become less likely to engage in environmentally unsustainable activities and hence reduce greenhouse gas emissions. The political carbon cycle uncovered by this Article could thus be caused by firms anticipating that Republican governors are less likely to support new climate regulations or enforce existing environmental laws.

To tentatively probe a causal connection between gubernatorial partisanship and corporate emissions, I analyze the effect of close elections. After a Republican replaces a Democratic governor in a closely contested election, which cannot be easily predicted in advance, companies headquartered in that state increase their greenhouse gas emissions. The partisanship of state governors thus has a significant effect on the greenhouse gas emissions of private-sector businesses. However, firms do not decrease their emissions after a Democrat replaces a Republican governor in a closely contested election. This could be because of the asymmetric polarization of the two major U.S. parties, with Republicans being far more likely to convert their ideological priorities on issues such as climate into policy once they are in power. Democratic governors who won a close election, on the other hand, may be hesitant to introduce climate rules that could slow economic growth, for fear of losing the support of voters. Therefore, the political carbon cycle is driven by companies increasing their greenhouse gas levels after the election of Republican governors.

One concern with the results could be that corporate emissions are determined by factors such as a company’s size, the type of business it operates in, and general time trends such as the rate of overall economic growth. To account for such possibilities, all results in this Article control for invariant firm characteristics, as well as industry and time trends. Therefore, the political cycle in corporate greenhouse gas emissions is unlikely to be explained by company-specific factors or time trends in emissions for certain industries. The results also persist when I control for a battery of financial variables shown in the literature to affect the level of corporate pollution, such as firm size, profitability, and leverage.

The empirical findings have major legal and policy implications. This Article’s result showing that companies change their emission levels in response to gubernatorial politics indicates that managers may use their discretion to cater to the preferences of politicians, rather than to safeguard the welfare of constituencies such as workers and consumers. I therefore suggest that granting managers discretion to prioritize social issues such as climate change would not necessarily lead to lower pollution, due to political pressure exerted by government on firms. The empirical analysis in this Article also indicates that voluntary pledges by corporations to reduce pollution have limited effect. Elections have consequences for corporate emissions, and voluntary corporate actions may not suffice to reduce pollution as long as approximately half of state governors are skeptical about climate change mitigation. Thus, the findings raise questions about whether corporate social responsibility (CSR) is an effective substitute for a broader political consensus on climate change mitigation. Finally, this Article provides a novel justification for mandatory corporate disclosure of greenhouse gas emissions. Investors, equipped with information about firms’ climate impact, will be able to push managers to become more prosocial and diminish the magnitude of the political carbon cycle, assuming that investors are willing and able to use that information.