Empirical calibration of climate policy using corporate solvency: A UK case study

Journal article

Emission reductions improve the chances that dangerous anthropogenic climate change will be averted, but could also cause some firms financial distress. Corporate failures, especially if they are unnecessary, add to the social cost of abatement. Social value can be permanently destroyed by the dissolution of organizational capital, deadweight losses paid to liquidators, and unemployment. This article proposes using measures of corporate solvency as an objective tool for policy makers to calibrate the optimal stringency of climate change policies, so that they can deliver the least loss of corporate solvency for a given level of emission reductions. They could also be used to determine the generosity of any compensation to address losses to corporate solvency. We demonstrate this approach using a case study of the UK’s Carbon Price Support (a carbon tax).

Authors: Caldecott, B; Dericks, G

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: Taylor and Francis
• Journal: Climate Policy
• Volume: 18
• Issue: 6
• Pages: 766-780
• Publication date: 2017-12-13
• Acceptance date: 2017-09-15
• DOI: 10.1080/14693062.2017.1382318
• EISSN: 1752-7457
• ISSN: 1469-3062
• Keywords: corporate solvency; climate change policy; stranded assets; Altman’s Z-score; policy calibration