Operational compliance levers, environmental performance, and firm performance under cap and trade regulation

James Kroes, Ravi Subramanian, Ramanath Subramanyam

Research output: Contribution to journalArticlepeer-review


Cap and trade programs impose limits on industry emissions but offer individual firms the flexibility to choose among different operational levers toward compliance, including inputs, process changes, and the use of allowances to account for emissions. In this paper, we examine the relationships among (1) levers for compliance (at-source pollution prevention, end-of-pipe pollution control, and the use of allowances); (2) environmental performance; and (3) firm market performance for the context of stringent cap and trade regulation with allowance grandfathering (i.e., the allocation of allowances for free). To investigate these relationships, we use data on publicly traded utility firms operating coal-fired generating units regulated by the U.S. Acid Rain Program from three principal sources: the U.S. Energy Information Administration, the U.S. Environmental Protection Agency, and the Compustat database. Our results indicate a significant relationship between better environmental performance and lower firm market performance over at least a three-year period. From a regulatory perspective, our results show a negative association between allowance grandfathering and firm environmental performance. Overall, by explicitly considering the context of stringent regulation, we find a counter-example to the view that better environmental performance generally associates with better economic performance.

Original languageEnglish (US)
Pages (from-to)186-201
Number of pages16
JournalManufacturing and Service Operations Management
Issue number2
StatePublished - Mar 2012


  • Cap and trade
  • Empirical research
  • Environmental compliance
  • Environmental operations
  • Public policy

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research


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