Abstract
This paper develops theory suggesting that, relative to purely domestic firms, multinational enterprises (MNEs) have both greater economic incentives and greater strategic and operational means to respond to expanding carbon regulations with reductions in their carbon footprint. We then test this theory with data on changes in carbon emissions of over 6,000 industrial plants during Phase 2 (2008-2012) of the European Union’s Emissions Trading Scheme. Our empirical analyses indicate that MNEs maintain: a) consistent carbon reductions across institutional contexts; and, b) an overall carbon performance edge over domestic firms. We find, however, that the carbon performance gap between MNEs and domestic firms narrowed in in host countries experiencing a transition towards more stringent market regulatory systems. By demonstrating that the effects of national and international carbon regulations interact in important ways with each other and with firm characteristics, this paper deepens our understanding of how institutions are likely to shape the ongoing energy transition towards a low-carbon economy.