Fuel Prices and Carbon Emissions: The Role of Structured Management Practices

Abstract

Fuel prices are central to climate policies, and adapting to rising fuel prices is a critical challenge for businesses worldwide. In this study, I propose that firms' responses to fuel price changes are the result of complex organizational decisions, and that structured management practices - featuring formalized processes such as monitoring, target-setting, and incentives - can significantly influence their adaptation processes and environmental performance. Leveraging a newly constructed plant-level dataset from the Japanese manufacturing sector, I estimate the effect of fuel price variation on CO2 emissions by exploiting the fact that an increase in the national price of a particular fuel affects plants differentially based on their reliance on that fuel. The findings show that firms reduce CO2 emissions when fuel prices rise; however, these responses are not uniform. Firms with more structured practices are more responsive to fuel price increases, especially when decision-making is decentralized. This pattern indicates that structured management practices may enable firms to tap into local knowledge necessary for effective adaptation. A main policy implication stemming from my findings is that carbon pricing may be effective in reducing CO2 emissions, but its effectiveness may vary across firms depending on their management practices and organizational structure.