Green Screening: Firm Environmental Strategy Amidst Policy Implementation Uncertainty in the European Union

Abstract

We examine how firms can strategically respond to policy implementation uncertainty by screening communication exchanges between policy-implementing agencies and their policy-formulating political principals. These exchanges can be viewed as a signal of the agencies’ commitment to policy implementation. The costlier the agency's communication, the stronger the expected implementation and the likelier that firms will commit to long-term, irreversible investments prior to the actual implementation of the policy. We test these hypotheses empirically by examining the investments made by European electric power companies in new renewable energy facilities from 2004 to 2009 and associating these investments with the communication between country agencies and the European Union Commission upon the latter's resolution to establish a greenhouse gas emissions trading scheme.