One Climate Change Policy’s Unexpected Trade-Off

As policymakers worldwide tackle the growing threat of climate change, some have successfully reduced industrial greenhouse gas emissions by enforcing limits for companies through a policy called cap-and-trade. 

However, new Carlson School research reveals an unintended consequence of this policy—increases in toxic chemical pollution.

“This is a worrying finding because it suggests that cap-and-trade policies may negatively impact other environmental outcomes, even as they effectively address climate change,” says Strategic Management & Entrepreneurship Professor Aseem Kaul.

Kaul’s research examines data from manufacturing plants subject to cap-and-trade in California, where the policy took effect in 2013. Kaul and Narae Lee, ’22 PhD, used Environmental Protection Agency data to investigate how the facilities’ emissions changed with the policy, comparing this to emissions from similar plants in other states. 

The research found that although the California companies reduced their greenhouse gas emissions after cap-and-trade rolled out, they also increased their toxic chemical emissions by about 25 to 40 percent. The facilities that cut back more on greenhouse gas emissions saw the greatest increase in toxic emissions. Further analysis showed this increase in toxic emissions occurred because firms subject to cap-and-trade reduced their efforts to treat toxic waste. 

“Such waste treatment efforts account for about 15 percent of all greenhouse gas emissions. So, when the cost of greenhouse gas emissions increases, firms have an incentive to reduce voluntary waste treatment and may find it easier to do so than to cut back on other production activities,” explains Kaul, who is the Carlson School’s Mosaic Company - Jim Prokopanko Professor for Corporate Responsibility.

However, evidence suggests ways to limit the unintended effect. Kaul and Lee found that companies that had invested in technologies to reduce waste generation at the source and those under close monitoring by government regulators were less likely to increase their toxic emissions after cap-and-trade began. 

“This research highlights the need to consider the full range of environmental outcomes that might be impacted by climate policy, and how firms’ strategic responses may produce unintended negative consequences,” Kaul says. “We absolutely need policies like cap-and-trade to help address climate change, but we also need to think about how to design them better."