Working Paper: CEPR ID: DP17868
Authors: Martina Hengge; Ugo Panizza; Richard Varghese
Abstract: Understanding the impact of climate mitigation policies is key to designing effective carbon pricing tools. We use institutional features of the EU Emissions Trading System (ETS) and high-frequency data on more than 2,000 publicly listed European firms over 2011-21 to study the impact of carbon policies on stock returns. After extracting the surprise component of regulatoryactions, we show that events resulting in higher carbon prices lead to negative abnormal returns which increase with a firm’s carbon intensity. This negative relationship is even stronger for firmsin sectors which do not participate in the EU ETS suggesting 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.
Keywords: carbon emissions; carbon prices; climate change; transition risk; stock returns
JEL Codes: G12; G14; G18; G32; G38; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory actions resulting in higher carbon prices (G18) | Negative abnormal returns for firms (G32) |
| Higher carbon prices (Q31) | Lower average daily returns (G19) |
| Negative relationship between carbon prices and stock returns (G12) | Stronger for firms in sectors not participating in the EU ETS (L59) |
| Policies increasing carbon prices (Q58) | Raise the cost of equity capital for emission-intensive firms (Q52) |
| Correlation between carbon prices and stock returns (G19) | Positively affected by firm-level carbon emissions on non-regulatory event days (G14) |
| Correlation between carbon prices and stock returns (G19) | Turns negative during regulatory event days (G14) |