Incentivizing Carbon Performance : How to Design Effective Carbon-Related Incentive Systems?

Based on data that S&P 500 firms voluntarily disclose to the CDP, we investigate the effectiveness of organizational incentive systems in improving carbon performance, an important non-financial dimension of organizational performance. Firms rely on both financial and non-financial carbon-related incentives to improve its carbon performance. Correcting for sample-induced endogeneity, we find that financial carbon-related incentives are associated with superior carbon performance, but non-financial carbon-related incentives are associated with inferior carbon performance. Our results indicate that the effectiveness of carbon-related incentives differs with regard to Scope 1 carbon emissions and Scope 2 carbon emissions. While financial carbon-related incentives improve carbon performance in terms of Scope 1 carbon emissions (‘motivational effect'), non-financial carbon-related incentives impair carbon performance in terms of Scope 2 carbon emissions (‘crowding-out effect'). Moreover, financial carbon-related incentives are more effective in improving carbon performance of firms from carbon-intensive industries than of firms from non-carbon-intensive industries