Verified carbon emissions and stock returns in the EU Emissions Trading System

Inessa Benchora and Sébastien Galanti

Energy Policy, 2024, vol. 193, issue C

Abstract: We study the stock returns of firms participating at the European Union Exchange Trading System (EU ETS), which are mostly high-greenhouse gas emitters from the energy sector, or very energy-consuming industries. This “cap and trade” scheme implies that high emitters (“brown” firms) must buy allowances for emission from low emitters (“green” firms). Thus, authorities require that CO2-equivalent emissions be verified by independent third-party carbon auditors. As a consequence our data is less prone to a “greenwashing” bias, in contrast with the literature which uses firms-provided, or data vendor-estimated emissions. In this particular framework, we show that green firms returns outperform brown ones, with an excess annual return between 6.6% and 7.9% across different variants, and with a slightly higher risk. Our results thus show that allowances scheme do modify the risk-return profile of stocks, which can provide a financial incentive to consider emissions in investment decisions. To favor ecological transition, policymakers could then generalize emissions trading systems and independent audits of emissions, and increase the cost of allowances.

Keywords: Emissions trading systems; Climate change; Transition risk; Asset pricing; Panel analysis; Ecological transition (search for similar items in EconPapers)
JEL-codes: G12 G15 O13 Q49 Q54 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:193:y:2024:i:c:s0301421524002842

DOI: 10.1016/j.enpol.2024.114264

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