How Firms Respond to Carbon Taxation

Although environmental regulations can incentivize firms to reduce emissions, how firms adapt may depend not only on their organizational characteristics but also on the physical realities of their assets. This paper examines how multinational spread, an organizational feature in which firms own and manage similar production activities across countries, and the physical asset characteristics of production facilities jointly shape firms’ responses to carbon taxation. Using global, real-time satellite data on carbon emissions from 882 steel plants across 67 countries over 96 months (January 2015 to December 2022), we analyze operational adjustments firms can make to reduce carbon emissions: producing more cleanly by reducing emissions intensity of production or producing less by reducing asset utilization. We first examine how firms adapt to Canada’s carbon tax using a difference-in-differences (DID) design and then examine the impact of carbon taxes across countries using a stacked DID design. Our analysis reveals that, following Canada’s carbon tax, firms without multinational spread reduce carbon emissions primarily by lowering asset utilization; in contrast, firms with multinational spread additionally reduce emissions intensity of production. Importantly, our analysis of carbon taxes across countries shows that multinational spread alone does not dictate firm adaptation. Adaptation is fundamentally influenced by the physical technology on the ground: firms with multinational spread reduce emissions intensity of production and increase asset utilization at their clean (electric arc furnace) plants relative to dirty plants. Our study thus sheds light on how firms pursue different adaptation strategies at production facilities in response to carbon taxation.