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Accounting for nearly 8% of global annual carbon dioxide (CO2) emissions, the cement industry is considered difficult to decarbonize. While a sizeable number of abatement levers for Portland cement production are technologically ready for deployment, many are still viewed as prohibitively expensive. Here we develop a generic abatement cost framework for identifying cost-efficient pathways toward substantial emission reductions. We calibrate our model with new industry data in the context of European cement plants that must obtain emission permits under the European Emission Trading System. We find that a price of €81 per ton of CO2, as observed on average in 2022, incentivizes firms to reduce their annual direct emissions by about one-third relative to the status quo. Yet, this willingness to abate emissions increases sharply at a carbon price of €100 per ton. If cement producers were to expect such carbon price levels to persist in the future, they would have incentives to reduce emissions by almost 80% relative to current emission levels.

Current corporate disclosures regarding carbon emissions lack commonly accepted accounting rules. The accrual accounting system for carbon emissions described here is grounded in the rules of historical cost accounting for operating assets, enabling the preparation of balance sheets and flow statements. The asset side of the balance sheet reports the carbon emissions embodied in operating assets. The liability side conveys the firm's cumulative direct emissions into the atmosphere as well as the cumulative emissions embodied in goods acquired from suppliers less those sold to customers. Flow statements report the cradle-to-gate carbon footprint of goods sold during the current period. Taken together, balance sheets and flow statements generate multiple indicators of a company's past, current and future performance with regard to carbon emissions.

Concerns about anthropogenic climate-change have led groups such as the Science-Based Targets Initiative to advocate for industry-specific emission reductions paths. Accordingly, many multinational firms have pledged achievement of net-zero greenhouse gas emissions by some target date, usually 2050. Such pledges, however, lack credibility without accurate and verifiable measurement of a company’s controllable carbon footprint.

As governments around the world reaffirm their commitments to reduce carbon emissions at national levels, numerous corporations have recently issued their own carbon reduction pledges. Such corporate "Net-Zero by 20xx" commitments doubled in 2020 and, leading up to the IPCC COP26 meeting, showed no sign of letting up in 2021. According to one recent count, about 20% of the largest 2,000 global firms have now made such pledges.1 With pressure from institutional investors, customers and employees building, such net-zero pledges deliver an immediate public relations win, as the firm acknowledges its corporate social responsibility and claims a “green mantle” for the business.

Using a wide sample of international publicly traded firms, this paper studies the rapidly increasing practice of relying on ESG metrics in executive compensation contracts. Our evidence suggests that this compensation practice varies at the country, industry, and firm level in ways that are consistent with efficient incentive contracting. We also observe that reliance on ESG metrics in executive compensation arrangements is associated with engagement, voting, and trading by institutional investors, which suggests that firms could be adopting this practice to align their management’s objectives with the preferences of certain shareholder groups. Finally, we find that the adoption of ESG Pay is accompanied by improvements in key ESG outcomes, but not by improvements in financial performance.