Pay for Environmental Performance: The Effect of Incentive Provision on Carbon Emissions

Abstract

An increasing number of companies are striving to reduce their carbon emissions and, as a result, they provide incentives to their employees linked to the reduction of carbon emissions. Using both fixed effects models and matching samples we find evidence that the use of monetary incentives is associated with higher carbon emissions. Moreover, we find that the use of nonmonetary incentives is associated with lower carbon emissions. Consistent with monetary incentives crowding out motivation for prosocial behavior, we find that the effect of monetary incentives on carbon emissions is fully eliminated when these incentives are provided to employees with formally assigned responsibility for environmental performance. Furthermore, by employing a two-stage multinomial logistic model, we provide insights into factors affecting companies' decisions on incentive provision, as well as showing that the impact of monetary incentives on carbon emissions remains significant after controlling for potential selection bias in our sample.