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Drivers of Tight Carbon Control in the Context of Climate Change Regulation
Article in Accounting and Finance · November 2017

DOI: 10.1111/acfi.12320
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Drivers of Tight Carbon Control in the Context of Climate
Change Regulation
Binh Bui
Victoria Business School
Victoria University of Wellington, Wellington, New Zealand
Larelle Chapple*
QUT Business School
Queensland University of Technology, Brisbane, Australia
Thu Phuong Truong

Victoria Business School
Victoria University of Wellington, Wellington, New Zealand
Accepted version at Accounting and Finance
* Corresponding author
Telephone: +61 7 3138 0086
Facsimile: +61 7 3138 1812
Email: larelle.chapple@qut.edu.au
Acknowledgements: We are grateful for the participants from the 2013 Performance
Management Association Australasian Conference and 2015 Asian-Pacific Conference on
International Accounting Issues for their valuable feedback. Special thanks Tom Smith and one
anonymous reviewer whose suggestions have considerably improved the paper. We thank Nur
Atiqah Haleme for her research assistance.
Drivers of Tight Carbon Control in the Context of Climate
Change Regulation
Abstract
Our study examines the drivers of tight budgetary control in carbon management in the context
of climate change regulation. Using the setting of New Zealand Emissions Trading Scheme
(ETS), our study explores how firms manage their carbon performance using carbon-focused
budgetary control. Based on a survey data from New Zealand firms, including both those with
and those without an ETS compliance obligations, our results suggest that economic and
regulatory environmental pressures, the level of proactiveness of emissions management
strategy, the level of integration of carbon issues in strategic and operational processes and the
perceived importance of carbon issues are the significant drivers of tight carbon-focused
budgetary control.
Keywords: tight budgetary control; climate change issues; carbon emissions
JEL Classifications: D22 and K32

1. Introduction
An “emissions trading scheme” (ETS) converts emissions from a costless activity into an input
cost to production (Cook, 2009; Hopwood, 2009). Such regulation renders climate change and
environmental issues more visible and urgent, motivating firms to pay more attention to
emissions management for their organisational reputation (Bowen, 2000) and in the interests
of longer term accounting outcomes and costing (Linnenluecke, Birt, and Griffiths, 2015). Our
study investigates how firms organise and use their management control systems (MCS) to
manage carbon emissions now that emissions are a costly and visible activity.
Accounting tools, such as carbon accounting, play an important role in emission management
and sustainability. Carbon accounting provides financial and non-financial information of
environmental performance and is an effective tool to garner top management attention and
support, and stimulate communication throughout the organisation (Bebbington and Larringa-
González, 2008; Burritt, Schaltegger, and Zvezdov, 2011). As prior studies focus on the
disclosure of carbon information (Hopwood, 2009; Burritt et al., 2011), we examine the control
mechanisms and systems that firms employ to achieve their carbon management plan and
objectives. What drive certain design and use of an organisation’s carbon-focused control
system is an important theoretical and empirical question.
Carbon management systems or “eco-control” (Henri and Journeault, 2010) involves “the
process of planning, objective setting, monitoring, feedback and corrective action in alignment
with carbon management plans, clear goals and policies should be set to guide the process as a
whole” (Lee, 2012). Our contributions in this study are two-fold: first, we look at how firms
set carbon reduction targets, and how targets are used in monitoring and evaluating carbon
performance. Tang and Luo (2014) find that the presence of a carbon reduction target predicts
strong carbon performance; however, we research the commitment of an organisation to carbon
1
mitigation. Considering that carbon reduction targets have driven debate around climate change
policy at international and national levels, operationalisation around targets in topical.
Secondly, we contribute by showing how firms use carbon information in decision making.
Prior studies suggest that how carbon information and measures are deployed impact on carbon
performance (Burritt et al., 2011; Lisi, 2015). Top management can use information in an
interactive manner to stimulate and guide organisational action in response to emergent risks
and opportunities in the operating environment (Gond et al., 2012; Tang and Luo, 2014).
Effective carbon management requires strong signalling of the importance of carbon issues,
among which, is the integration of carbon information in remuneration and incentive systems
(Pershing and Tudela, 2003; Ratnatunga and Balachandran, 2009).
Our study brings together these two elements of carbon management system, with the focus on
not just the measurement and reporting of carbon information but the significance of carbon
targets, and the level of managerial attention devoted to carbon issues and the integration of
carbon information into the traditional MCS such as budgeting and performance evaluation.
Budgetary control involves a cycle of target setting, monitoring organisational performance
against those targets, and undertaking corrective action as well as the link of budget to incentive
system. Hence it provides a theoretical concept to synthesise the elements of carbon
management system (CMS). Specifically, we focus on the “tightness” of budgetary control as
a more effective CMS (i.e. tighter control results in stronger carbon mitigation: Tang and Luo,
2014). In essence, we propose a model of CMS that relates incentive and congruent behaviour
with the firm’s carbon strategy and lead to carbon mitigation.
Our study utilises the concept of tight carbon control in the setting of New Zealand ETS to
explore how firms subject to mandatory ETS manage their carbon performance using carbon-
focused budgetary control. New Zealand is an ideal venue to investigate tight carbon control,
2
as the ETS has been in place since 2008 and indeed it was the first nation in the Asia-Pacific
region to institute carbon trading.1 The results suggest that the economic and regulatory
environmental pressures, the level of proactiveness of emissions management strategy and
integration of carbon issues in strategic and operational processes and perceived importance of
carbon issues are the most significant drivers of tight carbon-focused budgetary control.
Further, larger firms tend to exercise tighter budgetary control in carbon management.
The next two sections review the carbon management literature and budgetary control literature
and suggests how they are employed for carbon management purposes. This is followed by the
hypothesis development where the potential external and internal drivers of carbon focused
budgetary control are identified. Following the data description, empirical results of the
relations between budgetary control and its drivers are presented. The final section discusses
the results and contributions.
2. Carbon performance management and carbon management system
This section reviews the literature on organisational response to climate change issues and
managing carbon performance. Different typologies of climate change strategies have been
proposed and subjected to empirical tests. For example, Kolk and Pinkse (2005) suggest six
market strategies firms can adopt, ranging from innovation to compensatory approaches,
internal or external orientation, doing on their own or in cooperation with external partners.
Similarly, Weinhofer and Hoffman (2010) suggest that firms can use compensation or
reduction approaches to address their emissions levels, or move to carbon independence where
they develop carbon free facilities and processes or products. Some use a staged model to
1
The ETS requirements were enacted through amendments to the Climate Change Response Act 2002 (NZ).
Korea launched its ETS in 2015 and China’s market will commence in 2017 (Ministry for the Environment, 2016).
Australia’s “carbon pricing mechanism” was repealed in 2014.
3
classify the different levels of responsiveness a firm may adopt to climate change issues. For
example, Hoffman (2005) argues that firms are moving from a risk-focused strategy to one that
emphasises and utilises business opportunities from climate change. Jeswani, Wehrmeyer, and
Mulugetta (2008) classify corporate climate change response into four clusters of firms:
indifferent, beginners, emerging and active.
An emerging literature addresses accounting responses to accommodate climate change issues.
Much of the previous research focuses on measurement and disclosure of carbon issues.
Change in accounting frameworks to measure and disclose carbon information and costs is
seen as necessary especially under carbon pricing mechanisms (Boston and Lempp, 2011;
Milne and Grubnic, 2011; Martinov-Bennie, 2012). Many studies have looked at the nature of
carbon disclosure itself (Andrew and Cortese, 2011; de Aguiar and Bebbington, 2014; Haslam
et al., 2014; Rankin, Windsor, and Wahyuni, 2011; Halkos and Skouloudis, 2016) and the
association between disclosure and carbon and economic performance (Griffin, Lont, and Sun,
2012; Matsumura, Prakash, and Vera-Muñoz, 2013; Luo and Tang, 2014). Carbon
management accounting is argued to be valuable in various decision settings, such as
evaluating product emissions and costs, identifying emission reductions and investment
possibilities and facilitating decisions across different organisational functions (Burritt et al.,
2011; Stechemesser and Guenther, 2012; Tsai et al., 2012). Implementing carbon accounting
is believed to result in multiple benefits such as cost savings, improved competitiveness,
internal innovation and coordination (Rankin et al., 2011; Ratnatunga and Jones, 2012). Scope
remains to examine the elements that characterise firms’ carbon management system.
3. Attributes of tight carbon control
Applying the concept of tight budgetary control to carbon management, we use the term “tight
carbon control”. It is only recently that management accounting studies have evaluated the cost
4
of social and environmental reporting (Hopper and Bui, 2016). Other terms like “eco-control”
(Henri and Journeault, 2010) or “environmental management control systems” (Pondeville,
Swaen, and De Rongé, 2013) have been used; and in a more limited capacity, so has
“environmental management accounting” (Qian, Burritt, and Monroe, 2011; Derchi, Burkert,
and Oyon, 2013). The term “carbon accounting” is used to describe the quantification of a
firm’s emissions (Lee, 2012; Schaltegger and Csutora, 2012). However, as our study is
concerned with the use of carbon information in setting the firm’s carbon budget and the use
of this budget to create congruent behaviour with carbon management strategy, we consider
the term “tight carbon control” as the most appropriate.
Based on Van der Stede (2001), five main attributes of tight budgetary control and hence tight
carbon control can be identified:
• Bottom-line versus line-item control (detail): Whether management focuses on bottom
line or line item is an important indication of control tightness.
• Emphasis on meeting the budget (emphasis): Management’s perceived priority for
meeting budgetary targets, such as targets on carbon reduction or carbon-related costs
and expenditure.
• Intensity of budget-related communication (intensity): The nature of communication
of carbon budgets and targets between subordinates and superiors. It involves frequency
of communication, the formation of a team comprising different levels of management
to discuss budgeting, and the quality of the consultation with senior management on
how to achieve carbon budgets and targets.2
2
Later studies agree that intensity of budget communication, as part of tight budgetary control, is also a defining
component of interactive control (Bisbe, Batista-Foguet, and Chenhall, 2007; Merchant and Van der Stede, 2012).
5
• Budget revision during the year (revision): The extent to which revision is permitted;
whether budgetary targets are actually reviewed and revised throughout the reporting
year to reflect the changing circumstances or environment.
• Tolerance for interim deviation (deviate): A loose control environment requires little
routine intervention by management, absent a significant event. In contrast, a more
strict control environment reports any deviations regularly with evidence that
management undertakes immediate corrective actions.
Van der Stede’s (2001) tight budgetary control construct has been widely used and accepted in
the management control literature, especially in papers examining budgetary control (Hansen
and Van der Stede, 2004; Marginson and Ogden, 2005; Bisbe et al., 2007; Libby and Lindsay,
2010; Johansson and Siverbo, 2014). Hansen and Van der Stede (2004) use a multi-item
measure developed from Van der Stede (2001) to capture budget difficulty and the extent that
managers are evaluated based on their ability to achieve the budget. However, most of these
papers selected only one or two characteristics of tight budgetary control to examine. We
propose that our study is innovative because the three characteristics (except budget revision
and deviation) are applied as measures for the dependent variable. In proposing the independent
variable determinants, we examine the MCS literature to identify the external and internal
pressures on tight budgetary control to apply to carbon management.
4. Determinants of tight carbon control
4.1. Stakeholder pressures
Many institutional pressures regarding carbon management are associated with the nature of
specific industries, as some industries are perceived by the public as environmentally-
damaging (Pellegrino and Lodhia, 2012). Firms operating in sensitive industries are likely to
6
be subjected to more extensive environmental rules and regulation (Clemens, 1997; Alciatore,
Dee, and Easton, 2004) and to experience environmental crises/incidents that create stronger
stakeholder pressures (Greening and Gray, 1994; Abouzeid and Weaver, 1978; Alciatore et al.,
2004); enhancing expectations to take corrective action (Bowen, 2000; Céspedes-Lorente, de-
Burgos-Jiménez, and Álvarez-Gil, 2003).
Similarly, environmentally-concerned investors pressure companies to act more responsibly
and take initiatives to combat climate change (Okereke, 2007; Kolk, Levy, and Pinkse, 2008).
Prior research suggests that customer groups and financial markets are less influential in
affecting companies’ environmental decision or response to climate change issues (James,
Viney, and Liu, 1999; Jeswani et al., 2008). Despite increasing investor demands through such
mechanisms as the Carbon Disclosure Project, investors have criticised firms for not providing
high quality carbon information (Sullivan and Gouldson, 2012).
Many studies have highlighted significant contributions of top management in ensuring the
success of companies’ environmental management strategy and practices and influencing the
board regarding the importance of environmental issues (Hutchinson, 1996; James et al., 1999;
Sharma, 2000; González-Benito and González-Benito, 2006). Top management who have high
environmental awareness and concern are more likely to prioritise carbon management
(Gunningham, Kagan, and Thornton, 2003). Additionally, employees may drive environmental
management through their high awareness of climate change problems (Buysse and Verbeke,
2003) and motivate more meaningful disclosure (Kent and Zunker, 2015). Employee
engagement and education are found to be associated with more proactive environmental
strategy and higher environmental performance (Doonan, Lanoie, and Laplante, 2005). This
leads to the following hypothesis regarding tight carbon control:
7
H1: High intensity of stakeholder pressures is positively associated with tight
carbon budgetary control.
4.2. Economic and regulatory environments
Characteristics of the external economic environment are be described as turbulence, hostility,
complexity and uncertainty. Management accounting literature has discussed the impact of
uncertainty, hostility (in market competition), and complexity in MCS (Chenhall, 2003).
Environmental uncertainty leads to a combination of traditional budgetary controls and
interpersonal and flexible controls (Merchant, 1985; Ezzamel, 1990; Chapman, 1997), and thus
generally a more open, externally focused, nonfinancial styles of MCS (Chenhall, 2003).
External uncertainty associated with the development or availability of low-carbon technology
may make it difficult to effectively reduce emission levels. Pondeville et al. (2013) find that
the level of external uncertainty is negatively associated with formal environmental
management control systems, because the formal controls are hard to change given the
unpredictability of green markets and legislation. The difficulty with carbon management is
management’s reluctance to set tight carbon reduction targets or emphasise carbon budgetary
control.
Similarly, environmental complexity (whether arising from the government or suppliers) was
found to be associated with less emphasis on budgets (Brownell, 1985). As different countries’
legislators have moved towards stricter climate change regulations, and the more complex
climate change regulation becomes, the higher the demand for internal monitoring and
controlling of the firm’s carbon emissions, as well as an increased need for interactions between
superiors and subordinates to discuss monitoring and controlling activities. Prior studies also
suggest that external hostility, such as competition, is associated with the reliance on formal
8
accounting-based controls (Otley, 1978; Chenhall, 2003). It can be similarly argued that the
intense competition leads to higher emphasis on carbon budgetary control; good carbon
management can create a green image for the organisation, creating a point of competitive
differentiation (Burritt et al., 2011; Rankin et al., 2011). Therefore, two hypotheses are
proposed:
H2a: External environment uncertainty is negatively associated with tight carbon
budgetary control.
H2b: External environment hostility and complexity are associated with tight
4.3. Proactiveness of emissions management strategy
A proactive strategy reflects a firm’s effort to focus on long term solutions to minimise their
environmental impact (Sharma and Vredenburg, 1998; Gunningham et al., 2003; Linnenluecke
et al, 2015). Emission reductions can be achieved proactively through pollution prevention;
prior research argues that a pollution prevention strategy leads to simultaneous reductions in
emissions and capital expenditures for pollution control (Hart, 1995; Eiadat et al., 2008).
Developing low-impact products and associated marketing that cater for customers’ increasing
preference to buy products with low negative environmental impact is another proactive
strategy (Klassen and McLaughlin, 1996). Firms can design and market green products by
involving multiple stakeholders in product development and planning process (Hart, 1995;
Jeswani et al., 2008).
Firms also seek to pursue a sustainable development strategy, where research and development
into low emitting technologies is essential. These technologies, if successful, substantially
reduce firms’ carbon emissions and reduce production costs, thereby increasing product
9
performance and competitive advantage (Hart, 1995; Okereke, 2007). Further, sustainable
development involves the addressing of environmental issues on multiple fronts (social,
economic, environmental) and at different management levels, as well as across functions and
departments (Hart, 1995; Starik and Rands, 1995). A sustainable development strategy requires
not only changes to current production processes but also a radical transformation to business
model (Elkington, 1994; Roome and Bergin, 2000).
A proactive strategy will require organisation-wide commitment to emission reduction, short
term and long term alike. More proactive strategy tends to be associated with more formal
environmental MCS (Pondeville et al., 2013). Tight reduction targets and linkage to
performance evaluation improve goal congruence; thus enhance levels of commitment.
Further, budgeting for carbon initiatives is particularly important among firms with a proactive
strategy because green products re-design or technological development requires substantial
human and non-human resource allocation. Additionally, a proactive strategy potentially brings
about future competitive advantage, through green products or industry-leading technology,
and therefore top management is likely to assign high importance to carbon information that
monitors the organisation’s performance in these areas. Carbon budgetary targets and measures
will therefore be extensively used in top management meetings as well as in the interaction
between top management and subordinates in the relevant departments in making strategic
product and technological investment decisions. It leads to the following hypothesis:
H3: The proactiveness of emissions management strategy is positively associated
with tight carbon budgetary control.
10
4.4. Strategic and operational integration
As sustainability becomes a strategically important issue in response to tightened
environmental and climate change policies (Garrod and Chadwick, 1996; Hutchinson, 1996;
Lee, 2009), firms that are committed to a sustainability plan tend to have a clear and focused
strategic perspective on how to address sustainability in their value chain, markets, products
and operations (Rowledge, Barton, and Brady, 1999). For example, many leading
manufacturing companies in Europe, United States and Asia now incorporate “green” and
“sustainability” themes throughout their business operations (Lee, 2009). The integration of
carbon issues in strategic planning process and business as usual may lead to stronger
budgetary control. As carbon management becomes strategically important and thus integrated
in both the strategic planning process and business as usual activities, carbon budgeting plays
an essential role in providing top and lower management with information on the performance
of carbon management strategies and plans. This information in turn enables management to
make appropriate strategic and operational decisions in improving carbon performance and
achieve the desired cost savings, profit or reputational enhancement. Thus, the following
hypothesis is suggested:
H4: The strategic and operational integration of carbon issues is positively
associated with tight carbon budgetary control.
4.5. Significance of carbon issues
Prior studies (Grandlund and Taipaleenmäki, 2005; Davila and Foster, 2005, 2007) suggest
that perceived need by top management is one determinant of the adoption of a particular
control system. By definition, interactive control systems are special ways of using traditional
MCS to focus “attention on strategic issues” (Simons, 1992, p. 45). Thus the degree to which
11
management considers carbon issues as strategic and important will drive organisations to use
carbon control in certain ways. Carbon issues can be seen as strategically important by their
impacts on profit, competitiveness, or social legitimacy. Profit has always been the biggest
motivation underlying companies’ decision to implement green activities like carbon
management (Okereke, 2007). A number of studies have discovered a positive relationship
between environmental management and companies’ financial performance through cost
savings and avoidance of future environmental liabilities (Klassen and McLaughlin, 1996;
Miles and Covin, 2000). Implementation of environmental practices also allows companies to
become customers’ preferences and thus increase market competitiveness (Bansal and Roth,
2000; Levy and Kolk, 2002; Okereke, 2007).
Moreover, legitimacy and reputation play a role in motivating firms to engage in sustainable
business practice (Haddock-Fraser and Fraser, 2008). As carbon performance becomes
essential to a firm’s image and reputation due to increasing societal awareness of carbon issues
and stakeholders’ pressures, firms find themselves undertaking emission management
activities so as to maintain legitimacy (Bansal and Roth, 2000; Jeswani et al., 2008).
Firms that perceive high importance of carbon issues as they affect their profits,
competitiveness, or reputation thus have a strong motivation to use carbon budgetary control
appropriately to enable effective emission management. High emphasis on a carbon budget
through setting challenging reduction targets and linking those targets to performance
evaluation can make people aware of the importance of achieving reduction targets and
enhance organisation-wide carbon performance. As top management perceive strategic
significance associated with carbon issues, they are likely to monitor carbon information more
closely and use them extensively in the interaction with subordinates to generate carbon-related
strategy ideas and renewal (Simons, 1990, 1994). This leads to the following hypothesis:
12
H5: Perceived importance of carbon issues is positively associated with tight
5. Survey data and data analysis
5.1. Survey data
We select our sample from Kompass New Zealand database, commonly used to select samples
in Australasian studies (Roberts, 1999), especially New Zealand (Lawrence et al., 2006;
Rattray, Lord, and Shanahan, 2007; Collins, Roper, and Lawrence, 2010).3 Kompass allows
the identification of the headquarters and contact details of senior people in each business;
hence, it increases the chance of gaining access to the appropriate people in the target
organisations.
Since large firms are more likely to develop an established environmental management strategy
and adopt formal MCS, only firms with turnover exceeding 100 million NZD are selected from
the Kompass database. This results in 185 firms that span a wide range of industry sectors,
including services, manufacturing, transportation, government services, construction,
energy/utilities, and primary industry (agriculture/food production). Since our study operates
in a compulsory ETS regime environment, we include both firms who are participants under
the ETS and those who are not. Electronic survey was used as the primary method to collect
data, because it is believed this gives the participants more convenience and flexibility.
(Sekaran and Bougie, 2010).
Each of these firms was contacted by telephone to identify the appropriate person in charge of
their firm’s ETS compliance, or in case of non-participant ETS firms, environmental
3
Kompass New Zealand provides contact and personnel details of 15,129 businesses (2010 data) of New Zealand
businesses with more than 5 employees. The Kompass database website claims that it covers 2 million companies
in over 60 countries (www.kompass.co.nz).
13
management. The link to the on-line questionnaire was distributed via email (with two follow
up emails). From the 185 companies, a total of 86 responses were received, yielding a response
rate of 46.49%, which is comparable with 48% mean response rate of survey-based
management accounting research (Nazari, Kline, and Herremans, 2006).4 To test for non-
response bias, we use late responses (i.e. responses received after two reminders) as substitutes
for non-response (Wallace and Mellor, 1988; Bebbington et al., 1994). Untabulated results
indicate that there is no significant difference between the two groups regarding their
characteristics (i.e. industry, size, ETS obligation, export status, scope of operation and
ownership structure).
Out of 86 responses received, there is a relatively equal split between ETS participants and
non-participants, 44.58% and 55.42% respectively. The responses come from a variety of
industries from manufacturing sector (41.18%) to the construction industry (2.35%). Large
firms (more than 200 employees) comprise 65.12% of the responses, 19.77% having from 50
to 200 employees, and 15.12% having fewer than 50 employees. Firms who internationally
export comprise 52.33% and 74.12% of firms are only privately owned. The proportion of
multinational firms is highest with 39.53%, followed by nation-wide firms (37.21%) and local
firms (23.26%) (see Table 1 – Panel C).
[Insert Table 1 about here]
5.2. Measurement of carbon budgetary control items
Van der Stede’s five attributes of tight carbon budgetary control are operationalised into survey
questions. Pre-testing of the instrument suggested that the questions describing budget
4
Reasons given for non-response or decline of participation include: time constraint, the firm in restructuring or
financial distress, company policy precluding the survey participation, expression of disinterest, and the survey
not being seen as relevant (i.e. the firm not having any carbon management practice).
14
revision5 and budget deviation6 are not applicable to carbon management, so were removed
from the survey; hence, three attributes remain: detail, emphasis and intensity. Each attribute
is represented by a set of statements. Respondents were asked to express their level of
agreement with the statement, on a 5 Likert scale, from Strongly Disagree (1) to Strongly Agree
(5). Principal component analysis is conducted on each of the three sets of statements to derive
the common underlying factor that reflects the attribute of interest (micro-attribute). After the
common factors are derived, a composite score for achieved by running principal component
analysis on all the micro-attributes to arrive at the macro-attribute of tight carbon budgetary
control (see Table 2 – Panel A).
Detail of carbon budgetary targets and measures (DETAIL)
High level of detail in carbon management will require that carbon targets are set at
organisation-wide levels as well as split appropriately into functional and activity levels.
Carbon targets need to be designed to align with the organisation’s varying objectives, such as
customers or financial (Hoffman and Woody, 2008) and integrated in the organisation’s
performance measurement system (Burritt et al., 2011). Further, setting an overall budget for
all carbon initiatives reflect a loose type of budgetary control whereby top management is only
interested in the high-level carbon performance, leaving the detail of specific activities and
initiatives to lower management. Note that this contrasts prior studies, e.g. Van der Stede
(2001), which assume that tight budgetary control comprises top management focus on line-
item deviation.
Detail of carbon targets and measures are operationalised by two items (see Table 1 – Panel
A). As expected, high detail in carbon measures and targets (thus decentralised carbon
5
Most firms have an annual budget and only revise it on an annual basis.
6
Although firms do report carbon information quarterly, it is just part of routine reporting and most firms do not
pay attention to interim budget deviation or require detailed explanations on those deviations.
15
management) is consistent with a loose style by top management in monitoring carbon
performance. This suggests that high detail in carbon targets is seen as enabling rather than
constraining, by decentralising carbon management responsibility and maintaining high-level
oversight by senior managers.
Emphasis on meeting the carbon budget (EMPHASIS)
This attribute captures extent to which achieving carbon budgetary targets is considered
essential by top management (see Table 1 – Panel A). It utilises Hopwood’s (1972) evaluative
style of budget use (items 1 and 3) and also includes goal difficulty (item 2). Setting this budget
ensures that top management can trace a firm’s expenses and cost savings from carbon
activities against the set budget and thus assess the financial impacts of carbon management
(Burritt et al., 2011). The relative importance of financial measures over non-financial
measures is also captured, due to the perceived significant role played by carbon accounting
information in carbon management process (Burritt et al., 2011; Schaltegger and Csutora,
2012).
Intensity of carbon budget communication and use (INTENSITY)
This attribute is measured with reference to Simons’ (1990) definition of interactive control. A
control is interactive when it receives intense attention from top management and high degree
of intervention by top management in subordinates’ decision making (see Table 1 – Panel A).
The statements are devised based on Van der Stede (2001) (items 1 and 5) to reflect the nature
and level of interaction between superiors and subordinates in communicating and discussing
carbon budget-related matters. Additionally, following Simons (1994) items 2 and 6 are
developed to capture the attention to and use of carbon targets and measures by operational
managers in their decision making. Items 3 and 4 illustrate the intensity of discussing carbon
information by top management and its use in strategy review and renewal process.
16
Macro-construct of tight carbon budgetary control
The computed micro-constructs are aggregated to form the unobserved carbon control tightness
construct (see Table 2 – Panel A). Table 2 shows that all the three micro-constructs load
excellently on the macro-construct at more than 0.700. This suggests that the micro attributes
reflect important characteristics of tight carbon control.
In order of importance, tight carbon control composes of the detail of carbon targets and
measures (0.747), the level of top management emphasis on meeting carbon targets and budget
(0.879), and the intensity of carbon information communication and use (0.893). Untabulated
results show that reversing back, all the carbon budgetary control items load satisfactorily on
this macro construct at 0.466 or above. This confirms the appropriateness of the survey items
in reflecting the nature of tight carbon control.
Furthermore, the positive factor loadings suggest that high detail of carbon targets and
measures are consistent with high top management emphasis on meeting carbon targets and
budgets and strong interactive use of carbon information. This suggests a revised “tightness”
concept on carbon management, in that management displays a flexible but conscious style of
control whereby day-to-day carbon management is devolved to local levels, with top
management signalling the importance of achieving carbon reduction targets and financial
budget at corporate levels and in communication with lower managers.
Table 2 also provides the sample size used to derive the factor loadings as well as the
Cronbach’s alpha measure that assesses the reliability of the summative rating scale composed
of the factor indicator variables used.
17
5.3. Measurement of drivers of tight carbon control
Consistent with the literature, the study examines the factors that drive the design and use of
tight carbon control, see Table 2 - Panel B. The design of the survey is informed by extant
environmental management literature. First, the items that reflect the degree of stakeholder
pressures are designed based on Henriques and Sadorsky (1996) (for community and
customers) and Okereke (2007) (for investors) and resolve into five elements around public
and customers’ preferences and expectations and staff/employees’ sensitivity to environmental
issues. Second, three elements of external technical environments are examined: technology
(its availability and uncertainty), regulation (its complexity), and competition (its intensity).
These elements are measured following Bansal and Roth (2000), Jeswani et al. (2008), and
Chenhall (2003). Third, regarding carbon strategy proactiveness three attributes were
investigated: development of products and R&D, and improvement activities. The statements
describing strategic proactiveness were designed based on Hart (1995). Fourth, for strategic
integration, based on Hutchinson (1996) and Lee (2009), two elements were designed around
the exsitance and operationalisation of of inegrated strategy. Finally, the perceived
importance of carbon issues is measured through the potential impacts of carbon emissions
on organisational performance: costs (Okereke, 2007), market competitiveness (Bansal and
Roth, 2000; Miles and Covin, 2000; Levy and Kolk, 2002; Okereke, 2007) and reputation
(Haddock-Fraser and Tourelle, 2010).
Principal component analysis was undertaken to derive unobserved common factors for the
observed items. Eight items load onto three main factors with clear distinction. The first five
items describe the degree of environmental concern and pressures from different stakeholder
groups and top management, and they all load satisfactorily onto factors 1 and 2 (Stakeholder
Pressures – External and Internal) at 0.800 and above. The next three items measure the
18
characteristics of the technical environment in which a firm operates (technological
availability, regulatory complexity and market competition) and they all load satisfactorily onto
factor 3 (Technical Environment) at 0.652 or above. All the items for each of the strategy
constructs (Strategy Proactiveness, Strategic Integration and Perceived Importance of Carbon
Issues) load excellently onto the underlying construct at above 0.878 (see Table 2 – Panel B).
5.4. Control variables
Our study controls for industry and size since they affect firms’ environmental practices
(Henriques and Sadorsky, 1996; Levy and Kolk, 2002; González-Benito and González-Benito,
2006) and their use of environmental information (Cormier, Magnan, and Van-Velthoven,
2005; Brammer and Pavelin, 2008). As regulatory compliance is one key reason for adopting
environmental improvement practices (James et al., 1999; Okereke, 2007; Jeswani et al., 2008)
whether a firm has a compliance obligation under the ETS is also controlled for. We also
include three additional control variables, including whether the firms export their products to
international markets, their scope of operation and ownership structure.
5.5. Regression model
We estimate the following regression model to investigate the drivers of tight carbon control:
DETAIL|EMPHASIS|INTENSITY|CCTIGHTNESS = α0 + α1SP_EX + α2SP_IN + α3TECH_ENVI +

α4STRA_PRO + α5STRA_INTE + α6ISSUE_IMPO + α7IND_SERVICE + α8IND_MANU +
α9IND_TRANSPORT + α10IND_GOVERN + α11IND_ENERGY + α12IND_PRIMARY + α13SIZE +
α14COMPLIANCE + α15EXPORT + α16OP_SCOPE + α17OWN_STRUCTURE + ε
Given the small sample size, we also re-estimate the above model using bootstrapping method.
The definitions of dependent and independent variables in the regression model are as follows:
DETAIL, EMPHASIS, INTENSITY and CCTIGHTNESS are carbon budgetary control items estimated from the
principal component analysis – where CCTIGHTNESS is the aggregate measure.
SP_EX is the external stakeholder pressures.
19
SP_IN is the internal stakeholder pressures.
TECH_ENVI is the technical environment.
STRA_PRO is the proactiveness of emissions management strategy.
STRA_INTE is the strategic and operational integration.
ISSUE_IMPO is the perceived importance of carbon issue.
IND_SERVICE, IND_MANU, IND_TRANSPORT, IND_GOVERN, IND_ENERGY and IND_PRIMARY are
dichotomous variables taking the value of 1 if the firm belongs to the services, manufacturing, transportation,
government services, energy/utilities and primary (agriculture/food production) industries, respectively.
SIZE is an ordered variable taking the value of 1, 2 and 3 if the firm of small, medium and large scale, respectively.
COMPLIANCE is a dichotomous variable taking the value of 1 if the firm is a compliance entity under the
Emission Trading Scheme.
EXPORT is a dichotomous variable taking the value of 1 if the firm exports its products to international market.
OP_SCOPE is an ordered variable taking the value of 1, 2 and 3 if the firm is a local, nation-wide, and
multinational firm, respectively.
OWN_STRUCTURE is a dichotomous variable taking the value of 1 if the firm is privately owned.
Table 3 presents correlations among independent variables, which indicates no serious
incidence of multicollinearity.
6. Results
6.1 Results and Discussion
Table 4 presents the regression results for four proxies of tight carbon budgetary control –
DETAIL, EMPHASIS, INTENSITY and CCTIGHTNESS.
H1 predicts a positive relation between stakeholder pressures and carbon control tightness.
However, inconsistent with H1, neither external stakeholder pressures nor internal stakeholder
pressures are significantly associated with all aspects of carbon control tightness. This suggest
that strong stakeholder pressures as manifested in the high environmental awareness and
concern by customers, investors, staff, top management, and wider society do not lead to high
20
level of detail in carbon targets and measures (division-level rather than organisation-wide,
coupled with a carbon budget), strong management emphasis on meeting the carbon targets
and budget (challenging targets and linking them to managerial performance evaluation), and
high intensity in communicating and using carbon targets and budget in decision making and
strategic evaluation and renewal process. Therefore, H1 is not supported.
Except for the INTENSITY model, the characteristics of the economic and regulatory
environments are found to be positively associated with the attributes of control tightness.
Interestingly, against H2a that suggests a negative relation between uncertainty and control
tightness, regression results suggest that higher uncertainty leads to higher level of detail,
emphasis and intensity in carbon control use. A possible explanation for this is the availability
and certainty of external technology affects the degree to which the firm internalises its carbon
reduction efforts. More effort is delegated to divisional levels (DETAIL) to research and
develop new technology, as well as to undertake marginal carbon reduction opportunities,
rather than major reductions through technology replacement. High level of detail is coupled
with high emphasis, i.e. challenging reduction targets and linking them to managerial
evaluation (EMPHASIS). Earlier management accounting studies (Ezzamel, 1990; Merchant,
1985; Chapman, 1997) suggest that firms often combine tight and formal control with flexible
and interactive controls under conditions of high uncertainty. In contrast, our results indicate
that high external uncertainty does not discourage nor motivate interpersonal interaction
between superiors and subordinates in relation to carbon issues or high use of carbon
information in strategy review and planning. Further, contrary to Jeswani et al. (2008) and
Pondeville et al. (2013) the results suggest that external uncertainty does not necessarily
prevent environmental management practices.
21
H2b suggests a positive relation between external environment hostility and complexity and
tight carbon budgetary control. Our results support H2b in all models except the INTENSITY
model. Under conditions of strong competition, firms seem to consider carbon management an
area of differentiation, such as through green branding. However, they can only make their
green brand credible by taking carbon management seriously; that is, they need to set
challenging targets, break reduction targets and measures into divisional levels and individual
objectives, and holding managers responsible accordingly (DETAIL and EMPHASIS) so that
concrete carbon reductions are achieved. The same applies to regulatory complexity. More
complex environmental regulation requires firms to be comprehensive in its environmental
management programme, ensuring that its covers the whole organisation and its activities. This
necessitates the break-down of targets into divisional levels and linking the targets to
performance evaluation so that all divisional managers take carbon issues seriously and
ensuring that their activities and operations fall within the compliance scope under the
regulation. However, hostility and complexity are not associated with intensity of carbon
related communication, suggesting that market competition and regulatory complexity do not
lead to more consideration of carbon issues at top management levels. The results from the
CCTIGHTNESS model suggest that the overall more carbon control tightness is exercised
under conditions of strong market competition and regulatory uncertainty.
H3 is only supported by the result from the DETAIL model. The results from the remaining
three models (EMPHASIS, INTENSITY and CCTIGHTNESS) do not find an association
between strategy proactiveness and control tightness. Therefore whether a firm undertakes a
proactive or reactive/passive approach to carbon management does not have an impact on the
tightness of carbon control. This contrasts to Pondeville et al. (2013) who found that proactive
strategy leads to more formal environmental MCS. It is noted that the three strategy typologies
captured in proactive strategy include pollution control, product design, and sustainable
22
development. These three typologies may not cover the whole range of possible strategies
available to organisations when they embark on carbon management, potentially limitation of
this study.
Consistent with H4, our results confirm that strategic integration is significantly and positively
associated with all attributes of tight carbon control and the overall tightness construct. This
suggests that firms that seek to integrate carbon issues in strategic planning process and day-
to-day operations and activities do so by detailing carbon budgets and targets to divisional and
business objective levels. Further, they are likely to set more challenging reduction targets and
link them to managerial performance. Using carbon targets in performance evaluation ensures
goal congruence, and hence motivates managers to integrate carbon information in their
decision making. On the other hand, high top management attention to carbon budgets and
targets and their intensive interaction with subordinates enables carbon issues to become
integral to the strategic planning process and embedded in business strategy.
Regression results do not support H5 on the relation between issue importance and control
tightness, except for the INTENSITY model. Therefore whether carbon issues are perceived as
important and affecting organisational profitability, competitiveness or legitimacy does not
make a difference to the nature of carbon budget and targets, or the difficulty of targets and its
link to performance evaluation. Interestingly, however, issue importance is found to be
positively associated with INTENSITY, suggesting that perceived significance and impact of
carbon issues on organisational performance drives top management attention and use of
carbon budgets and targets and their interaction with subordinates. In other words, high impact
of carbon emissions on performance leads to intensive use and communication of carbon
measures and information by top management.
23
Size is found to be positively associated with one micro-attribute of carbon control tightness -
DETAIL as well as the macro-construct – CCTIGHTNESS. Larger firms tend to set more
difficult targets and detail them to divisional and business objective levels, and are more likely
to link them to managerial performance evaluation. Further, top management in these firms
pay more attention to carbon issues and discuss them interactively in subordinates. The
rationale for carbon control tightness is possibly not the higher emissions levels associated with
larger firms, because higher-emitting industries are not found to have an impact on carbon
control. Rather, it can be argued that larger firms tend to be multi-divisional and decentralised
and span geographically separated locations and space. Organisational structure is argued in
the literature to be determinant of control; Chenhall’s (2003) review suggests that “large
organisations with sophisticated technologies and high diversity that have more decentralized
structures are associated with more formal, traditional MCS” (p.147). Hence, decentralisation
in large organisations possibly have made reliance on carbon budgets and tight carbon control
both important and practical, as that is possibly the only way that effective carbon management
can be achieved throughout the organisation.
ETS compliance obligation is not found to be a significant driver of carbon control tightness.
This suggests that reduction targets and linking them to performance evaluation is a more
common practice among ETS participants than non-participants. This is understandable
because ETS participants have a concrete ETS liability to the government and thus a stronger
motivation to develop more challenging targets to lower that liability and resulted carbon cost.
However, results simultaneously suggest that an ETS compliance obligation does not lead to
more attention to carbon issues at top management nor an incentive to split targets to divisional
and business objective levels. It is somewhat paradoxical that a firm would set a challenging
target but would not specifying it to individual divisions nor carbon issues score much top
management consideration. This inevitably questions the effectiveness of carbon reduction.
24
Further, the results do not support prior studies which claim that compliance with regulation is
a major driver for environmental management (Jeswani et al., 2008). Our study argues, instead,
that once enforced environmental regulation impacts all firms, with or without a compliance
obligation, and therefore causes firms to undertake appropriate control to manage such impact
on organisational performance.
Other control variables including industry, export status, scope of operation and ownership
structure are not found to drive the tight carbon budgetary control.
The results from the re-estimation of regression models using the bootstrapping method
confirm consistent results with the main results.7
6.2 Common Method Variance
As the survey method has certain potential problems such as the common method variance (i.e.
variance that is attributable to the measurement method rather than to the constructs the
measures represent) (Lindell and Whitney, 2001; Molina-Castillo et al., 2013), we apply three
analytical techniques, including the Harman single factor, the common latent factor and the
common marker variable to estimate the degree to which our data may be influenced by biases
caused by common method variance (Eichhorn, 2014). We summarise the results from each
analytical techniques below.
The Harman single factor:
7
We choose a large bootstrap sample (see Table 5 for the number of replications) in order for the data to
approximate normal distribution and to obtain better estimates of test statistics. See Chenhall (2005) and Cheng
et al. (2007) for similar application of bootstrapping resampling procedure. However, it should be noted that while
bootstrapping resampling procedure offers better estimates of test statistics, it does not warrant a general finite-
sample.
25
We follow Harman (1960) and Podsakoff, MacKenzie and Lee (2003) to use exploratory factor
analysis to load all variables onto a single factor and constrain so that there is no rotation.
The Harman single factor technique estimates the common method variance to be 31.22
percent, which is far below the commonly accepted threshold of 50 percent. This therefore
suggests that common method bias may not be a problem in our dataset.
The common latent factor:
We introduce a common latent factor to which all the variables are related to while we are still
keeping the current model’s latent factors and their relationships in the analysis.
The common latent factor for all variables is 0.003 and their t-value indicates insignificance.
The common method variance is the square of the common latent factor which is 0.0032 =
0.00001. This common method variance value is far below the commonly accepted threshold
of 50 percent, thus suggesting no significant common method bias in our dataset.
The common marker variable:
We include three strategy measures (i.e. cost leadership – STRATEGY_COSTLEADERSHIP,
innovation – STRATEGY_INNNOVATION and focus – STRATEGY_FOCUS)8 which we
expect to be the cause of the bias itself and then load these measures onto a new method factor
8
Prior literature suggests that business strategy can significantly influence the choice of climate change strategies
and the design and use of management control systems (Miles and Snow, 1978; Simons, 1987; Govindarajan,
1988; Chenhall, 2003). For example, firms following a prospector strategy will emphasise innovation and research
and development, and hence will likely to pursue an innovation-focused climate change strategy as well integrate
carbon issues into business strategy to enable effective innovation. These firms are also likely to have top
management engage more intensively with carbon information so that a timely decision can be made to capture
potential opportunities. In contrast, firms that adopt a cost leadership business strategy will defend their current
position, hence less likely to undertake activities to transform their products, processes, and technologies towards
a lower carbon model, or incorporate carbon issues into the business strategy. However, as these firms emphasise
standardisation and formalisation to ensure efficiency and cost control, it is possible that they use detailed carbon
measures, set carbon targets and use them in performance evaluation, in order to achieve effective pollution
control and carbon cost reduction.
26
with all the current variables associated with the common method factor. The descriptive
statistics for these three strategy measures are provided in Table 6.
The common latent factor for all variables is 0.004 and their t-value indicates insignificance.
The common method variance is the square of the common latent factor which is 0.0042 =
0.00002. This common method variance value is far below the commonly accepted threshold
of 50 percent, thus suggesting no significant common method bias in our dataset.
6.3 Endogeneity
If management strategy and carbon budgetary control strategy are driven by similar factors,
endogeneity problem might be an issue in our study. To address the potential endogeneity
problem, we select a set of three instrumental variables, which are related to management
strategy aspects but not related to carbon budgetary control items, and employ the two-stage
least squares (2SLS) method to estimate the coefficients in our regression model. We choose
the efficiency of current equipment (INTERNAL_EQUIP)9, organisation structure
(INTERNAL_DECENTRAL)10 and the existence of formal assessment (ETS_ASSESSMENT)11
9
The efficiency of current equipment can drive strategy proactiveness. Firms that pursue a proactive
environmental strategy are driven by the potential to realise efficiency gains (Sharma and Vredenburg, 1998).
However, firms with highly efficient equipment have already enjoyed efficiency gains from energy reduction and
hence cannot mitigate carbon emissions substantially in their current production processes. This may reduce the
organisation’s incentive to undertake a proactive carbon strategy aimed at controlling production-related pollution
or pursuing new low-carbon technologies.
10
Differently, organisational structure can impact the extent of carbon strategic integration. Firms with a
decentralised structure give substantial autonomy and discretion to their business units. However, this will
increase the local-level differentiation from top management’s carbon-related strategic direction. In fact, Muller
(2006) argue that decentralised organisations suffer from the problem whereby a global CSR strategy involves
proactive CSR practices lacks the ownership and commitment at the local level. Consequently, we argue that
carbon issues are less likely to be integrated at the same consistent extent across different business units and across
management levels within decentralised organisations.
11
An understanding of the impact of carbon issues on the organisational performance will likely lead to higher
perceived importance of these issues from top management perspective. Hence, firms that have conducted a formal
assessment of the impact by the ETS on the organisation (formal ETS assessment) will have a more informed
view of how the ETS influences the organsiation’s costs, profitability, or legitimacy/reputation (Tang and Luo,
2014). Hence we expect that within firms with an ETS assessment, top management will perceive a higher level
of carbon issue importance.
27
as the three instrumental variables as we expect these three variables are related to the
proactiveness of emissions management strategy (STRA_PRO), the strategic and operational
integration (STRA_INTE) and the perceived importance of carbon issue (ISSUE_IMPO) while
not being directly related to carbon budgetary control items (DETAIL, EMPHASIS, INTENSITY
and CCTIGHTNESS). The descriptive statistics for these three instrumental variables are
provided in Table 7.
We conduct two tests of endogeneity, including the Durbin χ2 test and the Wu-Hausman F test.
The Durbin χ2 statistics and Wu-Hausman F statistics are provided in Table 8. Both tests have
confirmed that endogeneity problem is not an issue in our study.
7. Conclusion
While carbon accounting is often argued to play a significant role in an organisation’s
sustainability agenda (Bebbington and Larringa-González, 2008; Hopwood, 2009), few
empirical studies have examined the role of management control systems for implementing
carbon management strategy. Taking one step further and specifying strategy into appropriate
controls is critical to strategy implementation and success, and thus the effectiveness of cost
control, enhancing competitiveness or maintaining legitimacy (Arjaliès and Mundy, 2013;
Pondeville et al., 2013). Our study argues that the most active firms need to take that next step,
to operationalise and realise their strategy, and make their carbon agenda credible. Prior
research has suggested that environmental performance indicators and budgeting (i.e. setting
reduction targets) play an important role in proactive environmental strategy (Aragón-Correa
28
and Rubio-López, 2007; Ferreira, Moulang, and Hendro, 2010; Henri and Journeault, 2010;
Pondeville et al., 2013; Rodrigue, Magnan, and Boulianne, 2013).
We contribute to this literature by highlighting the three attributes of control around carbon
targets and budgets support carbon management strategy, namely: detail, emphasis and
intensity. Detail is represented in the extent to which carbon budgets are broken down and
delegated to business unit level. Emphasis is reflected in the difficulty of carbon reduction
targets, the availability of a financial carbon budget and the focus placed on target achievement
as part of managerial performance evaluation. Intensity is the attention placed on carbon
budgets and performance by top management and operational managers. Our study shows that
a decentralised style of carbon management through the break-down of carbon measures to
divisional levels, coupled with the setting a financial budget for carbon liability and related
activities are an integral part of carbon control. A style of control, where top management
establishes overall financial control over the carbon management programme, while leaving
the operational details of management to lower levels is likely to be more enabling than
constraining to carbon reduction innovation (Tessier and Otley, 2012; Arjaliès and Mundy,
2013). In turn, tight carbon control that emphasises carbon reduction (rather than the financial
benefits of doing so) is more effective in enabling the organisation to move towards the
integration of carbon issues in business strategy and ultimately a lower-carbon future (Aragón-
Correa and Rubio-López, 2007).
These insights on the attributes of carbon management systems extend prior research, which
has focused on the presence of particular carbon controls, such as a reduction target,
environmental committee, or environmental management system (Ratnatunga and
Balachandran, 2009; Henri and Journeault, 2010; Tang and Luo, 2014). We suggest that the
presence of carbon controls are not sufficient to signal or prove organisational commitment to
29
carbon management and mitigation: the tightness of controls is a stronger test. The difficulty
of carbon targets, high emphasis and intensity top management places on using carbon targets
and measures in strategic and operational decisions and performance evaluation are critical to
provide a strong incentive and goal congruence for carbon management strategy.
While our study treats the relationship between strategic integration and tight carbon control
as one-way, the empirical association can be interpreted as interactive (Kober, Ng, and Paul,
2007). The decision to integrate carbon issues in core business and strategy is a prerequisite for
all the changes at management control level. Tight carbon control enables this carbon
management strategy to be effectively implemented through to divisional levels, setting
difficult targets as well as high level of top management supervision and intervention in
decision making process. In turn, control tightness ensures that operational managers and
employees have strong awareness of carbon management and are motivated to integrate carbon
issues in business as usual, hence creating a high level of strategic integration. This further
corroborates the significant role played by management control in organisational carbon
programme.
The second contribution is the investigation of the potential drivers of carbon management
accounting practices in the context of a climate change regulation. The most significant drivers
are economic and regulatory environments and strategic integration. The next significant
drivers are the level of strategy proactiveness (affecting detail of control) and issue importance
(affecting intensity of control). Firm size is also a significant factor, with larger firms exercising
more carbon control. Thus, our study suggests while the economic and regulatory environments
are very important, the extent that an organisation applies carbon control depends on top
management’s strategic perception and responsiveness to carbon issues.
30
Although stakeholder pressures have been viewed as one of major forces driving firms to
undertake carbon management, we do not find that general pressures from organisational
stakeholders create a common and converging threat of legitimacy, which firms try to address
through extensive carbon management and tight carbon control. The self-rated score proposes
either that firms do not distinguish between major stakeholder groups related to carbon issues,
or that the global salience of carbon issues has led to the convergence of different groups’
awareness and resulted exerted pressures on businesses. Furthermore, it is possible that while
stakeholder pressures may drive the implementation of certain formal environmental MCS
(Rankin et al., 2011; Pondeville et al., 2013), our study shows that they not necessarily
determine how or the extent (the emphasis or intensity) that such MCS is used by management.
Our study shows that technical environment, in particular, regulatory complexity and
technological uncertainty are important drivers of a firm’s carbon control. Traditional budgets
are often seen as problematic in conditions of high regulatory complexity (Chenhall, 2003).
However, carbon budgets and tight targets are found in the present study to be conducive to
firms’ satisfying the varied requirements of environmental regulations. Further, different from
prior studies’ suggestion that formal MCS is not useful for reducing technology-related
uncertainty (Davila, 2000); our study argues that in a regulatory context of an ETS, formal
control might be valuable.
The most surprising result of our study, based on prior literature, is the lack of a statistically
significant relation between strategy proactiveness and the overall carbon control tightness
(Pondeville et al., 2013). However, reconciling this with the relationship between
uncertainty/complexity – control tightness, the result is explicable. The typology of proactive
strategy used portrays a radical approach to emissions management (product design,
technological replacement) rather than an incremental one. However, due to a variety of
31
constraints (resources, existing facilities and technology, external uncertainty) it is not possible
for all organisations to totally transform their business process and model. It is equally, if not
even more, important for firms undertaking incremental carbon strategy to employ tight carbon
control because it sends a strong message across the organisation regarding the importance of
making small improvements in carbon efficiency. Therefore, our study tentatively argues that
tight carbon control is useful for different types of carbon management strategies, whether they
are based on macro-level or micro-level changes to an organisation’s emissions levels.
The insights related to tight carbon control above also have significant practical implications.
When designing carbon management systems, managers and practitioners need to pay attention
to the controls to be implemented and management’s commitment to and focus on those
controls. Having formal accounting and controls such as carbon-related targets, budgets and
performance evaluation is especially important in a regulatory context for compliance. Our
findings suggest that tight carbon control is especially desirable for large firms that consider
carbon issues of strategic importance, and wish to integrate carbon management in strategic
planning and business as usual.
To conclude, carbon management is an increasingly important agenda in business, not only as
compliance but also proactively seeking sustainable development. The trend of integrating
carbon management in business strategy creates meaningful contribution by carbon
management accounting and control. Our study is an important breakthrough demonstrated by
the willingness of organisations and industry to participate in discussing the ways that their
organisations design and use their MCS for a focused purpose: carbon management and their
drivers.
32
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39
Table 1
Descriptive Statistics
Strongly Disagree Disagree Neutral Agree nor Disagree Agree Strongly Agree
Panel A: Carbon Budgetary Control Items
Detail
1. Our measures and targets for carbon emissions are broken down to
10 (12.20%) 21 (25.61%) 18 (21.95%) 29 (35.37%) 4 (4.88%)
business units and departments.
2. Our measures and targets for carbon emissions are developed as an
inherent part of each business objective and integrated in the 16 (19.51%) 22 (26.83%) 28 (34.15%) 14 (17.07%) 2 (2.44%)
organisation's key performance indicators.
Emphasis
1. Managers are evaluated based on the success that they achieve
18 (2.22%) 33 (40.74%) 20 (24.69%) 10 (12.35%) 0 (0.00%)
carbon targets.
2. The targets for emission reduction are tight and challenging. 11 (13.58%) 20 (24.69%) 33 (40.74%) 13 (16.05%) 4 (4.94%)
3. Senior managers place high importance on carbon target
15 (18.29%) 38 (46.34%) 22 (26.83%) 7 (8.54%) 0 (0.00%)
achievement in judging the performance of managers and employees.
4. We set an overall financial budget for emission reduction initiatives
14 (17.07%) 25 (30.49%) 16 (19.51%) 25 (30.49%) 2 (2.44%)
and carbon liability targets.
5. Top management considers financial measures the most important
4 (4.94%) 11 (13.58%) 12 (14.81%) 44 (54.32%) 10 (12.35%)
in the management of carbon emissions.
Intensity
1. Senior and operational managers discuss at face to face meetings on
how to achieve carbon targets and review carbon performance and 11 (13.41%) 29 (35.37%) 16 (19.51%) 25 (30.49%) 1 (1.22%)
reduction initiatives.
2. Operational managers pay regular attention to and monitor and
12 (14.63%) 31 (37.80%) 17 (20.73%) 21 (25.61%) 1 (1.22%)
review carbon targets and measures continuously.
3. Carbon budget and carbon performance are discussed as a regular
9 (10.98%) 18 (21.95%) 13 (15.85%) 38 (46.34%) 4 (4.88%)
agenda at strategic meeting.
4. Senior managers use carbon measures and targets actively in
12 (14.63%) 29 (35.37%) 23 (28.05%) 16 (19.51%) 2 (2.44%)
reviewing and revising carbon strategy.
5. The measures of emissions and emission reduction initiatives are
11 (13.41%) 25 (30.49%) 9 (10.98%) 31 (37.80%) 6 (7.32%)
reported and reviewed periodically and formally.
6. Carbon measures and targets are used in making daily operational
9 (10.98%) 22 (26.83%) 13 (15.85%) 36 (43.90%) 2 (2.44%)
decisions.
Panel B: External and Internal Driver Items
40
Stakeholder Pressures - External
1. Investors increasingly prefer to invest in companies with good
1 (1.15%) 6 (6.90%) 30 (34.48%) 44 (50.57%) 6 (6.90%)
environmental performance.
2. The public and wider society increasingly expect our organisations
1 (1.15%) 0 (0.00%) 5 (5.75%) 61 (70.11%) 20 (22.99%)
to be environmentally responsible.
3. Our customers are increasingly aware about the environment and
1 (1.15%) 4 (4.60%) 13 (14.94%) 55 (63.22%) 14 (16.09%)
demand for environmentally friendly products.
Stakeholder Pressures - Internal
1. Our top managements are very concerned about the environmental
1 (1.15%) 5 (5.75%) 13 (14.94%) 53 (60.92%) 15 (17.24%)
issues surrounded the organisation's operations and activities.
2. Our staffs/employees are highly environmentally concerned. 0 (0.00%) 4 (4.60%) 25 (28.74%) 46 (52.87%) 12 (13.79%)
Technical Environment
1. External technological development that enables emission reduction
6 (6.90%) 27 (31.03%) 35 (40.23%) 16 (18.39%) 3 (3.45%)
is not readily available and is highly uncertain.
2. Existing environmental regulations (including ETS) related to our
4 (4.60%) 7 (8.05%) 23 (26.44%) 40 (45.98%) 13 (14.94%)
company's activities and operations are highly diverse and complex.
3. The product and service markets in which we operate are highly
4 (4.60%) 3 (3.45%) 4 (4.60%) 29 (33.33%) 47 (54.02%)
competitive.
Strategy Proactiveness
1. Our carbon management strategy involves development of
7 (12.50%) 13 (23.21%) 15 (26.79%) 18 (32.14%) 3 (5.36%)
environmentally friendly products.
2. Our carbon management strategy involves the reduction of
5 (8.77%) 9 (15.79%) 18 (31.58%) 20 (35.09%) 5 (8.77%)
emissions through continuous improvement of production activities.
3. Our carbon management strategy involves the pursuit of sustainable
development through the research and investment in low-emitting 5 (8.62%) 7 (12.07%) 19 (32.76%) 20 (34.48%) 7 (12.07%)
technologies.
Strategic Integration
1. Emission management is part of my organisation's strategic
5 (6.02%) 11 (13.25%) 20 (24.10%) 41 (49.40%) 6 (7.23%)
planning and integrated in business strategy.
2. Emission management is integrated in my organisation's business
as usual activities and operations including manufacturing, product 6 (7.23%) 8 (9.64%) 19 (22.89%) 41 (49.40%) 9 (10.84%)
design, procurement, marketing, etc.
Perceived Importance of Carbon Issues
1. Emission management is highly important because emissions affect
5 (5.88%) 11 (12.94%) 15 (17.65%) 40 (47.06%) 14 (16.47%)
our organisation's costs, profitability and competitiveness.
41
2. Emission management is highly important because emissions
3 (3.53%) 13 (15.29%) 22 (25.88%) 38 (44.71%) 9 (10.59%)
affect our organisation's reputation.
Panel C: Firm Characteristics
Frequency Percentage
Industry
Services 8 9.41%
Manufacturing 35 41.18%
Transportation 8 9.41%
Government Services 12 14.12%
Construction 2 2.35%
Energy/Utilities 12 14.12%
Primary (Agriculture/Food Production) 8 9.41%
Size
Small 13 15.12%
Medium 17 19.77%
Large 56 65.12%
ETS Obligation
No ETS Obligation 46 55.42%
ETS Obligation 37 44.58%
Export
Non-export 41 47.67%
Export 45 52.33%
Scope of Operation
Local 20 23.26%
Nation-wide 32 37.21%
Multinational 34 39.53%
Ownership Structure
State-owned 22 25.88%
Privately owned 63 74.12%
Table 1 provides descriptive statistics for three carbon budgetary control items (Detail, Emphasis and Intensity), six external and internal drivers of tight carbon control (Stakeholder
Pressures - External, Stakeholder Pressures - Internal, Technical Environment, Strategy Proactiveness, Strategic Integration and Perceived Importance of Carbon Issues), and firm
characteristics (Industry, Size, ETS Obligation, Export, Scope of Operation and Ownership Structure).
42
Table 2
Principal Component Factor Analysis
Factor Cronbach's
Factor Name Factor Indicator Variables N
Loadings Alpha
Panel A: Carbon Budgetary Control Items
1. Our measures and targets for carbon emissions are broken
0.908
down to business units and departments.
Detail 2. Our measures and targets for carbon emissions are developed 82 0.788
as an inherent part of each business objective and integrated in 0.908
the organisation's key performance indicators.
1. Managers are evaluated based on the success that they
0.850
achieve carbon targets.
2. The targets for emission reduction are tight and challenging. 0.787
3. Senior managers place high importance on carbon target
achievement in judging the performance of managers and 0.721
Emphasis employees. 79 0.767
4. We set an overall financial budget for emission reduction

0.779
initiatives and carbon liability targets.
5. Top management considers financial measures the most
0.394
important in the management of carbon emissions.
1. Senior and operational managers discuss at face to face
meetings on how to achieve carbon targets and review carbon 0.838
performance and reduction initiatives.
2. Operational managers pay regular attention to and monitor
0.865
and review carbon targets and measures continuously.
3. Carbon budget and carbon performance are discussed as a
0.729
Intensity regular agenda at strategic meeting. 82 0.884
4. Senior managers use carbon measures and targets actively in
0.876
reviewing and revising carbon strategy.
5. The measures of emissions and emission reduction initiatives
0.721
are reported and reviewed periodically and formally.
6. Carbon measures and targets are used in making daily
0.741
operational decisions.
43
Detail 0.747
Carbon Control Tightness Emphasis 0.879 79 0.787
Intensity 0.893
Panel B: External and Internal Driver Items
1. Investors increasingly prefer to invest in companies with
0.800
good environmental performance.
2. The public and wider society increasingly expect our
Stakeholder Pressures - External 0.811 87 0.727
organisations to be environmentally responsible.
3. Our customers are increasingly aware about the environment
0.802
and demand for environmentally friendly products.
1. Our top managements are very concerned about the
environmental issues surrounded the organisation's operations 0.805
Stakeholder Pressures - Internal and activities. 87 0.458
2. Our staffs/employees are highly environmentally concerned. 0.805

1. External technological development that enables emission
0.831
reduction is not readily available and is highly uncertain.
2. Existing environmental regulations (including ETS) related
Technical Environment to our company's activities and operations are highly diverse 0.841 87 0.671
and complex.
3. The product and service markets in which we operate are
0.652
highly competitive.
1. Our carbon management strategy involves development of
0.911
environmentally friendly products.
2. Our carbon management strategy involves the reduction of
emissions through continuous improvement of production 0.922
Strategy Proactiveness 56 0.902
activities.
3. Our carbon management strategy involves the pursuit of
sustainable development through the research and investment in 0.912
low-emitting technologies.
1. Emission management is part of my organisation's strategic
Strategic Integration 0.913 83 0.799
planning and integrated in business strategy.
44
2. Emission management is integrated in my organisation's
business as usual activities and operations including 0.913
manufacturing, product design, procurement, marketing, etc.
affect our organisation's costs, profitability and 0.878
Perceived Importance of Carbon Issues competitiveness. 85 0.703
0.878
affect our organisation's reputation.
Table 2 reports the results of principal component factor analysis of three carbon budgetary control items (Detail, Emphasis and Intensity) and one integrated
carbon control tightness item (Carbon Control Tightness), and six external and internal drivers of tight carbon control (Stakeholder Pressures - External,
Stakeholder Pressures - Internal, Technical Environment, Strategy Proactiveness, Strategic Integration and Perceived Importance of Carbon Issues).
45
Table 3
Correlations among Independent Variables
SP_EX SP_IN TECH_ENVI STRA_PRO STRA_INTE ISSUE_IMPO IND_SERVICE IND_MANU IND_TRANSPORT
SP_EX 0.328** 0.062 0.317** 0.262* 0.21 -0.009 0.162 -0.08
SP_IN 0.287*** -0.079 -0.007 0.412*** 0.114 -0.014 -0.212 -0.239*
TECH_ENVI 0.216** -0.125 0.012 -0.075 0.144 -0.073 0.311** -0.040
STRA_PRO 0.364*** 0.024 -0.041 0.262* 0.153 -0.033 -0.012 -0.036
STRA_INTE 0.253** 0.237** 0.039 0.284** 0.435*** -0.366*** -0.125 0.017
ISSUE_IMPO 0.201* 0.122 0.195* 0.155 0.494*** -0.190 0.073 -0.120
IND_SERVICE -0.046 -0.020 0.002 -0.055 -0.250* -0.119 -0.146 0.044
IND_MANU 0.011 -0.199* 0.273** -0.046 -0.078 -0.027 -0.187* -0.225
IND_TRANSPORT 0.047 -0.029 -0.084 -0.043 0.130 -0.100 0.057 -0.216**
IND_GOVERN 0.039 -0.011 -0.215** 0.185 -0.022 -0.049 -0.085 -0.344***
IND_ENERGY 0.080 0.096 -0.130 -0.085 0.141 0.188* -0.085 -0.344***
IND_PRIMARY -0.002 0.124 0.182* -0.056 -0.040 -0.043 -0.139 -0.274**
SIZE -0.024 -0.072 -0.065 -0.024 0.187* 0.226** 0.042 0.047
COMPLIANCE 0.136 -0.120 0.173 -0.034 0.235** 0.318*** -0.275** 0.144
EXPORT -0.043 -0.160 0.378*** -0.091 0.017 0.075 -0.210* 0.500***
OP_SCOPE -0.133 -0.012 0.132 -0.019 0.012 0.017 0.151 0.272**
OWN_STRUCTURE -0.078 -0.148 0.255** -0.051 -0.059 -0.010 -0.027 0.465***
IND_TRANSPORT IND_GOVERN IND_ENERGY IND_PRIMARY SIZE COMPLIANCE EXPORT OP_SCOPE OWN_STRUCTURE
SP_EX -0.153 -0.084 0.060 -0.107 0.224 -0.010 -0.024 0.056
SP_IN 0.051 0.210 0.220 -0.120 -0.122 -0.248* -0.068 -0.232*
TECH_ENVI -0.309** -0.365*** 0.228 -0.020 0.109 0.348** 0.005 0.304**
STRA_PRO 0.136 -0.068 -0.016 0.032 -0.037 -0.081 -0.069 -0.033
STRA_INTE 0.019 0.154 0.069 0.302** 0.273** -0.075 -0.018 -0.180
ISSUE_IMPO -0.057 0.101 -0.045 0.095 0.303** 0.048 -0.067 0.027
IND_SERVICE -0.121 0.016 -0.151 0.108 0.293** -0.269* 0.113 0.069
IND_MANU -0.314** -0.393*** -0.393*** 0.100 0.100 0.504*** 0.352*** 0.433***
IND_TRANSPORT -0.092 -0.115 -0.115 -0.071 -0.176 -0.369*** 0.014 -0.009
IND_GOVERN -0.026 -0.102 -0.102 0.046 0.016 -0.326** -0.300** -0.593***
IND_ENERGY -0.136 -0.160 -0.128 0.032 0.140 -0.288** -0.318** -0.284**
IND_PRIMARY -0.108 -0.127 -0.127 -0.156 0.020 0.193 -0.079 0.020
SIZE 0.026 0.045 0.045 -0.162 0.080 0.163 0.200 -0.250*
COMPLIANCE -0.235** -0.136 0.252** -0.011 0.088 0.294** -0.178 -0.027
EXPORT -0.206* -0.288*** -0.220** 0.226** 0.078 0.283*** 0.216 0.259*
OP_SCOPE 0.026 -0.301*** -0.128 -0.067 0.141 -0.057 0.200* 0.220
46
OWN_STRUCTURE -0.059 -0.686*** -0.069 0.079 -0.185* 0.083 0.236** 0.228**
Table 3 provides the correlations among independent variables. Pearson and Spearman correlations are presented in the bottom left and top right corners, respectively. ***, ** and * indicate 0.01, 0.05 and
0.1 level of significance (two-tailed).
Where SP_EX is the external stakeholder pressures; SP_IN is the internal stakeholder pressures; TECH_ENVI is the technical environment; STRA_PRO is the proactiveness of emissions
management strategy; STRA_INTE is the strategic and operational integration; ISSUE_IMPO is the perceived importance of carbon issue; IND_SERVICE, IND_MANU,
IND_TRANSPORT, IND_GOVERN, IND_ENERGY and IND_PRIMARY are dichotomous variables taking the value of 1 if the firm belongs to the services, manufacturing,
transportation, government services, energy/utilities and primary (agriculture/food production) industries, respectively; SIZE is an ordered variable taking the value of 1, 2 and 3 if the
firm of small, medium and large scale, respectively; COMPLIANCE is a dichotomous variable taking the value of 1 if the firm is a compliance entity under the Emission Trading
Scheme; EXPORT is a dichotomous variable taking the value of 1 if the firm exports its products to international market; OP_SCOPE is an ordered variable taking the value of 1, 2
and 3 if the firm is a local, nation-wide, and multinational firm, respectively; and OWN_STRUCTURE is a dichotomous variable taking the value of 1 if the firm is privately owned.
47
Table 4
Drivers of Tight Carbon Control - Main Results
DETAIL EMPHASIS INTENSITY CCTIGHTNESS
Coefficient Coefficient Coefficient Coefficient
Expected Sign
(t-statistic) (t-statistic) (t-statistic) (t-statistic)
SP_EX + -0.021 0.122 0.103 0.066
(-0.120) (0.670) (0.600) (0.480)
SP_IN + 0.126 -0.182 0.133 0.013
(0.810) (-1.080) (0.830) (0.100)
TECH_ENVI + 0.279 0.318 0.161 0.303
(1.760**) (1.860**) (1.000) (2.340**)
STRA_PRO + 0.243 -0.018 -0.039 0.080
(1.880**) (-0.130) (-0.300) (0.750)
STRA_INTE + 0.446 0.638 0.337 0.576
(2.370**) (3.140***) (1.760**) (3.730***)
ISSUE_IMPO + -0.018 -0.068 0.251 0.066
(-0.150) (-0.490) (1.940**) (0.640)
IND_SERVICE ? -0.493 -0.517 -0.121 -0.495
(-1.140) (-1.100) (-0.270) (-1.390)
IND_MANU ? -0.641 -0.547 -0.081 -0.552
(-1.440) (-1.130) (-0.180) (-1.500)
IND_TRANSPORT ? 0.048 -0.847 -0.292 -0.310
(0.090) (-1.490) (-0.560) (-0.720)
IND_GOVERN ? -0.842 -0.201 -0.365 -0.546
(-1.030) (-0.230) (-0.440) (-0.820)
IND_ENERGY ? -0.782 -0.413 0.234 -0.350
(-1.290) (-0.630) (0.380) (-0.710)
IND_PRIMARY ? -0.819 -0.606 -0.007 -0.582
(-1.520) (-1.040) (-0.010) (-1.320)
SIZE ? 0.379 0.231 0.212 0.338
(2.220**) (1.250) (1.220) (2.410**)
COMPLIANCE ? 0.357 -0.135 0.318 0.191
(1.260) (-0.440) (1.110) (0.820)
EXPORT ? -0.357 0.010 -0.065 -0.157
(-1.020) (0.030) (-0.180) (-0.550)
OP_SCOPE ? -0.027 0.170 0.163 0.151
(-0.170) (0.980) (1.000) (1.150)
OWN_STRUCTURE ? 0.020 0.650 0.443 0.525
(0.050) (1.500) (1.090) (1.600)
Intercept ? -0.240 -0.955 -1.315 -1.110
(-0.290) (-1.070) (-1.570) (-1.650)
F-statistic 4.290*** 3.240*** 3.790*** 7.330***
2
Adjusted R 0.523 0.433 0.482 0.683
N 52 51 52 51
Table 4 shows regression results where DETAIL, EMPHASIS, INTENSITY and CCTIGHTNESS are carbon
budgetary control items.
DETAIL|EMPHASIS|INTENSITY|CCTIGHTNESS = α0 + α1SP_EX + α2SP_IN + α3TECH_ENVI +

α4STRA_PRO + α5STRA_INTE + α6ISSUE_IMPO + α7IND_SERVICE + α8IND_MANU +
α9IND_TRANSPORT + α10IND_GOVERN + α11IND_ENERGY + α12IND_PRIMARY + α13SIZE +
α14COMPLIANCE + α15EXPORT + α16OP_SCOPE + α17OWN_STRUCTURE + ε
48
where SP_EX is the external stakeholder pressures; SP_IN is the internal stakeholder pressures; TECH_ENVI
is the technical environment; STRA_PRO is the proactiveness of emissions management strategy; STRA_INTE
is the strategic and operational integration; ISSUE_IMPO is the perceived importance of carbon issue;
government services, energy/utilities and primary (agriculture/food production) industries, respectively; SIZE
is an ordered variable taking the value of 1, 2 and 3 if the firm of small, medium and large scale, respectively;
Emission Trading Scheme; EXPORT is a dichotomous variable taking the value of 1 if the firm exports its
products to international market; OP_SCOPE is an ordered variable taking the value of 1, 2 and 3 if the firm
is a local, nation-wide, and multinational firm, respectively; OWN_STRUCTURE is a dichotomous variable
taking the value of 1 if the firm is privately owned. ***, ** and * denote significance at 1 percent, 5 percent
and 10 percent levels, respectively.
49
Table 5
Drivers of Tight Carbon Control - Bootstrapping Results
Coefficient Coefficient Coefficient Coefficient
Expected Sign
(t-statistic) (t-statistic) (t-statistic) (t-statistic)
SP_EX + -0.021 0.122 0.103 0.066
(-0.100) (0.490) (0.450) (0.320)
SP_IN + 0.126 -0.182 0.133 0.013
(0.710) (-0.810) (0.680) (0.080)
TECH_ENVI + 0.279 0.318 0.161 0.303
(1.350*) (1.330*) (0.750) (1.730**)
STRA_PRO + 0.243 -0.018 -0.039 0.080
(1.360*) (-0.090) (-0.240) (0.540)
STRA_INTE + 0.446 0.638 0.337 0.576
(2.090**) (2.260**) (1.460*) (3.040***)
ISSUE_IMPO + -0.018 -0.068 0.251 0.066
(-0.120) (-0.370) (1.820**) (0.510)
IND_SERVICE ? -0.493 -0.517 -0.121 -0.495
(-1.020) (-0.800) (-0.260) (-1.240)
IND_MANU ? -0.641 -0.547 -0.081 -0.552
(-1.470) (-0.850) (-0.160) (-1.330)
IND_TRANSPORT ? 0.048 -0.847 -0.292 -0.310
(0.080) (-1.190) (-0.460) (-0.590)
IND_GOVERN ? -0.842 -0.201 -0.365 -0.546
(-0.690) (-0.140) (-0.300) (-0.530)
IND_ENERGY ? -0.782 -0.413 0.234 -0.350
(-1.010) (-0.470) (0.340) (-0.550)
IND_PRIMARY ? -0.819 -0.606 -0.007 -0.582
(-1.540) (-0.820) (-0.010) (-1.180)
SIZE ? 0.379 0.231 0.212 0.338
(1.880*) (1.030) (1.060) (2.160**)
COMPLIANCE ? 0.357 -0.135 0.318 0.191
(0.820) (-0.330) (0.780) (0.540)
EXPORT ? -0.357 0.010 -0.065 -0.157
(-0.810) (0.020) (-0.150) (-0.450)
OP_SCOPE ? -0.027 0.170 0.163 0.151
(-0.130) (0.800) (0.980) (1.030)
OWN_STRUCTURE ? 0.020 0.650 0.443 0.525
(0.040) (0.910) (0.880) (1.050)
Intercept ? -0.240 -0.955 -1.315 -1.110
(-0.240) (-0.750) (-1.450) (-1.370)
Replications 970 953 959 950
Wald Chi-square 87.350*** 34.680*** 54.350*** 87.170***
Adjusted R2 0.523 0.432 0.482 0.683
N 52 51 52 51
Table 4 shows regression results where DETAIL, EMPHASIS, INTENSITY and CCTIGHTNESS are carbon
budgetary control items.
DETAIL|EMPHASIS|INTENSITY|CCTIGHTNESS = β0 + β1SP_EX + β2SP_IN + β3TECH_ENVI +

β4STRA_PRO + β5STRA_INTE + β6ISSUE_IMPO + β7IND_SERVICE + β8IND_MANU +
β9IND_TRANSPORT + β10IND_GOVERN + β11IND_ENERGY + β12IND_PRIMARY + β13SIZE +
β14COMPLIANCE + β15EXPORT + β16OP_SCOPE + β17OWN_STRUCTURE + ε
50
where SP_EX is the external stakeholder pressures; SP_IN is the internal stakeholder pressures; TECH_ENVI
is the technical environment; STRA_PRO is the proactiveness of emissions management strategy; STRA_INTE
is the strategic and operational integration; ISSUE_IMPO is the perceived importance of carbon issue;
government services, energy/utilities and primary (agriculture/food production) industries, respectively; SIZE
is an ordered variable taking the value of 1, 2 and 3 if the firm of small, medium and large scale, respectively;
Emission Trading Scheme; EXPORT is a dichotomous variable taking the value of 1 if the firm exports its
products to international market; OP_SCOPE is an ordered variable taking the value of 1, 2 and 3 if the firm
is a local, nation-wide, and multinational firm, respectively; OWN_STRUCTURE is a dichotomous variable
taking the value of 1 if the firm is privately owned. ***, ** and * denote significance at 1 percent, 5 percent
and 10 percent levels, respectively.
51
Table 6
Descriptive Statistics - Strategy Measures
STRATEGY_COSTLEADERSHIP: Our primary strategy is to
3 (3.45%) 11 (12.64%) 22 (25.29%) 31 (35.63%) 20 (22.99%)
develop products/services with lowest cost possible.
STRATEGY_INNNOVATION: Our primary strategy is to be a
market leader in product innovations and develop unique 2 (2.30%) 4 (4.60%) 18 (20.69%) 32 (36.78%) 31 (35.63%)
products/services according to customers’ preferences.
STRATEGY_FOCUS: Our primary strategy is to produce
products/services that concentrate only on particular groups or 10 (11.49%) 20 (22.99%) 21 (24.14%) 30 (34.48%) 6 (6.90%)
customers.
Table 6 provides descriptive statistics for three strategy measures.
Table 7
Descriptive Statistics – Instrumental Variables
INTERNAL_EQUIP: Our production equipment/facilities are
0 (0.00%) 5 (5.75%) 23 (26.44%) 50 (57.47%) 9 (10.34%)
highly efficient.
INTERNAL_DECENTRAL: Our organisation is highly
7 (8.05%) 22 (25.29%) 28 (32.18%) 26 (29.89%) 4 (4.60%)
decentralised.
ETS_ASSESSMENT: My organisation has identified, analysed
4 (4.71%) 7 (8.24%) 10 (11.76%) 46 (54.12%) 18 (21.18%)
and assessed ETS-related risks and opportunities.
Table 7 provides descriptive statistics for three instrumental variables.
52
Table 8
Tests of Endogeneity
statistic statistic statistic statistic
(p-value) (p-value) (p-value) (p-value)
3.883 4.167 0.261 5.220
Durbin χ2 statistic
(0.274) (0.244) (0.967) (0.156)
0.834 0.890 0.052 1.140
Wu-Hausman F statistic
(0.486) (0.458) (0.984) (0.349)
Table 8 provides the Durbin χ2 statistic and Wu-Hausman F statistic for endogeneity testing.
53
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Drivers of Tight Carbon Control in the Context of Climate Change Regulation

Article in Accounting and Finance · November 2017

Binh Bui Larelle Chapple

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Thu Phuong Truong

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Thu Phuong Truong

Accepted version at Accounting and Finance

Keywords: tight budgetary control; climate change issues; carbon emissions

JEL Classifications: D22 and K32

and sustainability. Carbon accounting provides financial and non-financial information of

system is an important theoretical and empirical question.

strong carbon performance; however, we research the commitment of an organisation to carbon

policy at international and national levels, operationalisation around targets in topical.

(Pershing and Tudela, 2003; Ratnatunga and Balachandran, 2009).

Budgetary control involves a cycle of target setting, monitoring organisational performance

system. Hence it provides a theoretical concept to synthesise the elements of carbon

management system (CMS). Specifically, we focus on the “tightness” of budgetary control as

with the firm’s carbon strategy and lead to carbon mitigation.

environmental pressures, the level of proactiveness of emissions management strategy and

the results and contributions.

2. Carbon performance management and carbon management system

indifferent, beginners, emerging and active.

An emerging literature addresses accounting responses to accommodate climate change issues.

management accounting is argued to be valuable in various decision settings, such as

is believed to result in multiple benefits such as cost savings, improved competitiveness,

3. Attributes of tight carbon control

(Henri and Journeault, 2010) or “environmental management control systems” (Pondeville,

the term “tight carbon control” as the most appropriate.

carbon control can be identified:

• Bottom-line versus line-item control (detail): Whether management focuses on bottom

line or line item is an important indication of control tightness.

• Emphasis on meeting the budget (emphasis): Management’s perceived priority for

meeting budgetary targets, such as targets on carbon reduction or carbon-related costs

• Intensity of budget-related communication (intensity): The nature of communication

of communication, the formation of a team comprising different levels of management

how to achieve carbon budgets and targets.2

year to reflect the changing circumstances or environment.

routine intervention by management, absent a significant event. In contrast, a more

management undertakes immediate corrective actions.

pressures on tight budgetary control to apply to carbon management.

4. Determinants of tight carbon control

4.1. Stakeholder pressures

specific industries, as some industries are perceived by the public as environmentally-

Burgos-Jiménez, and Álvarez-Gil, 2003).

Similarly, environmentally-concerned investors pressure companies to act more responsibly

affecting companies’ environmental decision or response to climate change issues (James,

high quality carbon information (Sullivan and Gouldson, 2012).

leads to the following hypothesis regarding tight carbon control:

carbon budgetary control.

4.2. Economic and regulatory environments

Characteristics of the external economic environment are be described as turbulence, hostility,

Environmental uncertainty leads to a combination of traditional budgetary controls and

External uncertainty associated with the development or availability of low-carbon technology

the level of external uncertainty is negatively associated with formal environmental

H2a: External environment uncertainty is negatively associated with tight carbon

carbon budgetary control.

4.3. Proactiveness of emissions management strategy

Jeswani et al., 2008).

into low emitting technologies is essential. These technologies, if successful, substantially

development involves the addressing of environmental issues on multiple fronts (social,

model (Elkington, 1994; Roome and Bergin, 2000).