The carrot and the stock: In search of stock-market incentives for decarbonization

Laurent Millischer, Tatiana Evdokimova and Oscar Fernandez

Energy Economics, 2023, vol. 120, issue C

Abstract: Financial markets can support the transition to a low-carbon economy by redirecting funds from highly emissive to clean investments. We study whether European stock markets take carbon prices into account in company valuations and to what degree they discriminate between firms with different carbon intensities. Using a novel dataset containing stock prices and carbon intensities of 338 European publicly traded companies between 2013 and 2021, we find a strongly statistically significant relationship between weekly carbon price changes and stock returns. Crucially, this relationship depends on firms’ carbon intensity: the higher the carbon costs a firm faces, the poorer its stock performance during the periods of carbon price increases. Emissions that firms cover with free allowances however do not impact this relationship, illustrating how, in the absence of carbon pricing, data disclosure alone might not be sufficient for financial markets to support climate change mitigation. The relationship we identify can provide an incentive for firms to decarbonize. We argue in favor of more ambitious carbon pricing policies, as this would strengthen the stock-market incentive channel.

Keywords: European Union Emissions Trading Scheme; Carbon price; Stock price valuation; Climate finance; Climate change mitigation; Multifactor market model (search for similar items in EconPapers)
JEL-codes: G12 G14 Q53 Q54 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: The Carrot and the Stock: In Search of Stock-Market Incentives for Decarbonization (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:120:y:2023:i:c:s0140988323001135

DOI: 10.1016/j.eneco.2023.106615

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