Carbon Emission Underreporting: Evidence from Satellite Emission Data

Abstract

I compare satellite emissions data to company reports filed with the U.S. Environmental Protection Agency (EPA) to identify firms that underreport their carbon emissions. I find that firms are more likely to underreport their emissions to the EPA when they are more publicly visible, face greater shareholder pressure for corporate greening, and are subject to cap-and-trade programs. Firms are less likely to underreport their emissions when they have greater monitoring from the board of directors and are more likely to be affected by environmental disclosure mandates. Next, I examine the relation between firms’ emission intensity and characteristics of their environmental disclosures in 10-Ks. As expected, I find that firms’ emission intensity relates positively to both the number of environmental keywords and optimistic tone used in disclosures. However, these relations weaken for firms that underreport their emissions. The results are consistent with firms attempting to hide their underreporting of emissions and avoid litigation risks. Overall, the results suggest that investors and other stakeholders should be cautious when using self-reported environmental information, and that regulators’ concern about existing climate disclosures in annual reports (10-Ks) not adequately reflecting actual operations is warranted.