Role of the Green Boards: Reduce Emission versus Optimize Emission

Abstract:

This article examines how directors’ behavior traits are reflected in the Emissions Trading Scheme (ETS) in South Korea. Similar to other ETS, Korean ETS relies on the principle of “cap-and-trade”. That is, a total amount of greenhouse gases (GHGs) emissions per firm is limited by the government. The firm then can buy (sell) the Certified Emission Reduction (CER) from other ETS participating firms if the firm’s GHG emissions are greater than (less than) the given cap. This mechanism creates a CER usage variation across firms. Using this setting, we investigate whether directors’ backgrounds have any effects on the variation. We find that the firms managed by directors with a work or academic background in environmental related fields (which we define as green boards) more strategically use the ETS. That is, green boards are able to manage the GHG emissions closer to the cap compared to non-green boards. At the same time, we also present that firms managed by green boards emit more GHGs compared to the firms managed by non-green boards. This ironic result indicates that firm’s priority lies not on reducing GHG emissions but on maximizing their productivity level, and those firms strategically use green boards to do so as green boards are capable of managing emissions. Furthermore, we investigate whether the relationships are evidenced under various conditions such as: industry-level emission and institutional ownership. The research has a clear contribution on highlighting the importance of imposing the right cap for companies.