Carbon credit and credibility in lawsuit: Evidence from CCER firms in China

This paper evaluates the China Certified Emission Reduction (CCER) program, a voluntary carbon reduction initiative, with a focus on the legal management practices of participating firms. We leverage several novel datasets, including firm-level litigation, financial, and environmental data, covering the period from 2014 to 2021. We have several main findings: First, CCER firms experience a significant reduction in legal liabilities reflected by decreased frequency of lawsuits in which firms are litigated and reduced claim points and claim amounts associated with these lawsuits. Second, firms holding CCER carbon credits significantly enhance their legal defense capabilities with a higher success rate in lawsuits and a notable reduction in both the ratio of claim points and the amounts upheld by courts. Our mechanism analysis also indicates that CCER firms achieve a significant reduction in CO2 emissions, air pollutant discharges, and environmental fees, as well as stronger financial positions, effectively reducing the risk of legal liabilities. The advantageous position of CCER firms are particularly prominent in financial defaults, contract, and labor disputes.