The Conversion Game: Cash Retention versus Cash Extraction in Corporate Decarbonization

The Conversion Game: Cash Retention versus Cash Extraction in Corporate Decarbonization Working paper, draft v9.1 — September 2026 Carbon charges remove cash from firms just when financially constrained emitters need it to invest in transformation. This paper studies the alternative incidence: a sanction that retains shareholder distributions inside the firm when a decarbonization target is missed. The implementing security is a Decarbonized Dividend Share (DDS): an ordinary share whose dividend, off an audited trajectory, is paid in discounted new shares of the same class. The cash stays in the firm and is credited to abatement. Conversion from ordinary shares is voluntary, individual, and irreversible. The legal building blocks exist in company law; the combination is new. Results Incidence. The per-share wealth gap between the two classes is dδ/(1−δ), independent of the adoption rate. Conversion is therefore a dominance decision, not a coordination game. The share register aggregates dispersed information about compliance. Financing. Under standard financing frictions, an extraction sanction has three regions: one-period compliance below a closed-form threshold; unbounded delay between that threshold and current profit; stranding above both. Retention funds abatement in all three. Design. An explicit interval for the scrip discount makes the mechanism sabotage-proof: no controlling coalition prefers to miss. As adoption completes, the price component of the instrument extinguishes. What remains is a conditional-retention constraint that does not require a traded carbon price. Scope The clause mobilises distribution-paying firms. It produces no public revenue. It consumes a credible trajectory; it does not produce one. It is a complement where a charge would strand the firm, and a candidate constraint at the end of a quantity system — not a substitute for a carbon price where the charge is feasible. Full proofs are in Appendix A. Simulations in Section 7 are Monte-Carlo estimates over 1,000 draws. Related work Boutron-Löchen (2025). Original specification of the instrument. Boutron-Löchen (2026). Normative foundation. Licence CC-BY-4.0. Working paper. Not peer-reviewed. JEL: D62, G32, G35, Q54, Q58