Carbon Policy and Stock Returns: Signals from Financial Markets

Carbon Policy and Stock Returns: Signals from Financial Markets
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Volume/Issue: Volume 2023 Issue 013
Publication date: January 2023
ISBN: 9798400229329
$20.00
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Summary

This paper uses institutional features of the EU Emissions Trading System (ETS) and highfrequency data on more than 2,000 publicly listed European firms over 2011–21 to study the impact of carbon policy on stock returns. After extracting the surprise component of regulatory actions, we show that events resulting in a higher carbon price lead to negative returns for firms with high emission intensities. This negative relationship is even stronger for firms in sectors which do not participate in the EU ETS. Taken together, our results indicate that investors price in transition risk stemming from the shift towards a low-carbon economy. We conclude that policies which increase carbon prices are effective in raising the cost of capital for emission intensive firms.