Trust, compliance and international regulation
This paper uses data on the compliance of installations regulated under the EU Emissions Trading Scheme (EU ETS) to investigate how the levels of trust in a country affect the compliance of firms with regulations on climate change.
The paper finds that a high level of trust in the country where an installation operates increases the probability that it will comply with regulations.
Furthermore, looking within countries and comparing subsidiaries of multinational companies reveals that trust prevalent in the country of their central headquarters has a strong positive influence on the compliance of the foreign affiliates. Subsidiaries of multinational companies from high-trust countries are more likely to be in compliance with regulations than subsidiaries of multinationals based in low-trust countries – even when those subsidiaries are operating in the same country and so are subject to the same regulation enforcement methods.
Key points for decision-makers
- The paper studies how trust affects compliance behaviour of installations regulated under the EU ETS.
- The paper finds that trust in the country where an installation is located has a strong positive influence on the likelihood that the installation will be in compliance with EU ETS regulations.
- In addition, looking within countries and comparing multinational subsidiaries operating in the same country shows that trust in the country of their central headquarters has influence on the foreign subsidiaries’ compliance. This emphasises the role of corporate culture.
- For example, in Germany, a subsidiary affiliated to a multinational from Norway (a high-trust country) would be more likely to be in compliance with the EU ETS than a subsidiary of a multinational company from Greece (a low-trust country), even though both operate in the same country and therefore are subject to the same enforcement methods.
- The magnitude of the effect is economically meaningful.
- A change in ownership from a multinational firm based in the country with the lowest level of trust in the sample (Philippines) to the country with the highest level of trust (Norway) is associated with a 1.5 percentage point decrease in the probability of non-compliance. The average non-compliance rate is 3.2%.
ISSN 2515-5717 (Online) – Grantham Research Institute Working Paper series
ISSN 2515-5709 (Online) – CCCEP Working Paper series