The surge of corporate climate commitments worldwide raises a fundamental question: Are these commitments the latest incarnation of cheap talk and greenwashing, or could they meaningfully accelerate decarbonization, even if firms are purely profit-driven? The 2015 Paris Agreement marked a turning point in climate negotiations, with nearly 200 nations committing to achieve “Net Zero” greenhouse gas emissions by 2050. Effective climate policy requires addressing a dual externality: not only should carbon emissions be taxed to mitigate climate damages directly, but green innovation should also be subsidized to take advantage of technological spillovers between firms and minimize the economic costs of decarbonization. Indeed, recent empirical work sheds some light on the appropriate policy mix: innovation subsidies could be efficient for innovation incentives, but green innovation alone, without carbon pricing, fails to reduce emissions. These findings reinforce the theoretical argument for policy complementarity. Yet government pledges to date lack specific enforcement mechanisms, and governments have struggled to implement credible long-run climate policies, in part due to extreme political uncertainty. The need for an efficient policy mix makes the lack of government credibility especially concerning.

Against the backdrop of such uncertainty, an unexpected group has emerged as catalysts for change: large corporations and institutional investors. The scale of private sector engagement is remarkable: global data from the Science Based Targets initiative (SBTi) shows that over 1,200 firms had made Net Zero corporate climate commitments between 2016 and 2023.

In Acharya, Engle and Wang (2024), we ask fundamental questions that arise from observing this surge in private sector climate commitments: Are these long-term commitments best viewed as meaningless posturing, or could they have a real impact on decarbonization? What is driving firms to commit? Is the main objective to please climate-conscious stakeholders even if following through hurts companies’ bottom line, or could firms and investors actually profit from making such commitments? And how do these private initiatives interact with government climate policies? To answer these questions, we develop a model of firms’ choices over production, emissions, and green innovation or technology adoption in an economy with two key market failures: environmental damages from carbon emissions and technological spillovers where social returns to green innovation exceed private returns.

Read the full article about corporate climate commitments by Olivier Wang, Robert Engle, and Viral Acharya at Harvard Law School Forum on Corporate Governance.