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Climate Disclosure Policies: Balancing Transparency and Economic Realities

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Jordan Keane in Climate & Environment June 2025 • 4 min read.

"Can greater transparency in climate disclosure policies really lead to lower emissions? A new study explores the complex interplay between transparency, economic incentives, and environmental impact."


The growing urgency of climate change has put corporate environmental responsibility under the microscope. Investors, consumers, and regulators are increasingly demanding that companies disclose their climate-related activities, particularly their greenhouse gas emissions. The push for greater transparency is rooted in the belief that it will hold companies accountable for their environmental impact, encouraging them to reduce emissions and adopt more sustainable practices.

But does simply mandating greater climate disclosure guarantee a greener future? A recent study by Shangen Li challenges this assumption, revealing a complex and sometimes counterintuitive relationship between transparency and environmental outcomes. The research delves into how different climate disclosure policies affect a company's behavior, considering factors like economic incentives, private information, and market dynamics.

Li's work highlights a critical trade-off: while transparency can indeed drive emissions reductions, it can also, paradoxically, lead to higher overall emissions under certain conditions. This finding raises important questions about the design of effective climate policies and the need to move beyond a one-size-fits-all approach to regulation.

The Paradox of Transparency: How Disclosure Can Backfire

Glass buildings turning green vs cracking, financial graph overlay.

At the heart of Li's analysis is the idea that companies respond to disclosure policies based on their own economic self-interest. While increased transparency is intended to internalize the 'externality' of pollution (the cost borne by society), it doesn't always work as planned. Increased disclosure transparency could result in a larger equilibrium externality, but never leaves the firm worse off. Consequently, mandating full disclosure is no different from maximizing the firm's private benefit while disregarding the ensuing externality.

To illustrate this, consider a simplified scenario of a firm choosing among three levels of emission: low, medium, and high. The study posits that the revenue increases as the level of emissions increase. To fund the project, the firm seeks investment in the financial market and the cost of capital increases with the firm's emission level. The firm will then choose the level of emission to maximize its profit.

  • No Disclosure: The firm has no obligation to reveal its emission levels.
  • Full Disclosure: The firm must accurately report its emission level.
  • Partial Disclosure: The firm only needs to disclose if its emissions are below a certain threshold, pooling higher emission levels together.
The study reveals that full disclosure can lead to lower emissions than no disclosure, but a less transparent policy (pooling medium and high emissions) might achieve even lower emissions. The firm chooses the emission level that maximizes profit. More transparent disclosure offers the firm a richer set of emission levels that can be sustained in equilibrium, and thereby enlarges the feasible set of its optimization problem. Put differently, pursuing maximal transparency is no different from maximizing the firm's profit without concerning the ensuing externalities.

Transparency Alone Is Not Enough

Li's research provides a nuanced perspective on the role of transparency in climate policy. While disclosure is undoubtedly important, it is not a silver bullet. Policymakers need to consider the specific economic incentives and information structures that shape corporate behavior. In some cases, less transparency, combined with targeted regulations, might be more effective in driving down emissions. The key takeaway is that climate policy should be designed with a deep understanding of how firms respond to different regulatory environments, recognizing that transparency is just one piece of the puzzle.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2402.11961,

Title: Optimal Design Of Climate Disclosure Policies: Transparency Versus Externality

Subject: econ.th

Authors: Shangen Li

Published: 19-02-2024

Everything You Need To Know

1

What is the main argument presented regarding climate disclosure policies?

The central argument, based on Shangen Li's study, is that while increased transparency in climate disclosure policies aims to reduce emissions, it can paradoxically lead to higher emissions under certain conditions. This is because companies respond to disclosure policies based on their economic self-interest. Therefore, simply mandating greater climate disclosure doesn't guarantee a greener future.

2

How can transparency in climate disclosure policies potentially lead to increased emissions, according to the study?

According to Li's research, full disclosure can sometimes result in higher emissions because it provides the firm with a broader range of emission levels. Firms choose the emission level that maximizes their profit. Full disclosure allows the firm to sustain an emission level in equilibrium that is not available when there is less transparency. The firm will then choose the level of emission to maximize its profit while disregarding the ensuing externality.

3

What are the different types of disclosure policies discussed in the study, and how do they impact a firm's decisions?

The study examines three types of climate disclosure policies: No Disclosure, Full Disclosure, and Partial Disclosure. In 'No Disclosure', the firm has no obligation to reveal its emission levels. In 'Full Disclosure', the firm must accurately report its emission level. In 'Partial Disclosure', the firm only needs to disclose if its emissions are below a certain threshold, pooling higher emission levels together. The firm chooses the emission level that maximizes profit based on these options.

4

Why is transparency alone not sufficient for effective climate policy, as indicated by the study?

The study emphasizes that while transparency is crucial, it's not a standalone solution. Policymakers need to consider the economic incentives and information structures that drive corporate behavior. The research suggests that in certain scenarios, less transparency coupled with targeted regulations could be more effective in reducing emissions. This is because the key is to understand how firms respond to different regulatory environments, recognizing that transparency is just one part of the overall strategy.

5

What are the practical implications of these findings for policymakers designing climate disclosure policies?

The findings suggest that policymakers should adopt a nuanced approach to climate disclosure. A 'one-size-fits-all' approach to transparency may not be optimal. Policymakers must deeply understand how companies react to regulations and consider specific economic incentives. They might need to balance transparency with other regulations to ensure environmental goals are met without hindering economic growth. The design of climate policies must go beyond merely mandating disclosure.

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