Signal received? Carbon price and financial–environmental performance prioritization in EU ETS firms

Ethan Eslahi, Anna Creti and María-Eugenia Sanin

International Review of Financial Analysis, 2025, vol. 105, issue C

Abstract: Understanding how firms interpret and respond to carbon price signals based on their strategic priorities is crucial for aligning climate policies with corporate financial and environmental objectives. We propose a novel composite financial–environmental performance index that adjusts the emphasis on each dimension. Using a machine learning model, we evaluate the sensitivity of this index to carbon emissions allowance prices for a large sample of firms under the European Union Emissions Trading System (EU ETS) from 2008 to 2022, while controlling for a comprehensive set of potential competing predictors. Results suggest that prioritizing financial performance induces negative responses to rising carbon prices, whereas emphasizing environmental performance, without strong profitability incentives, shows limited sensitivity. By examining how carbon price signals can shape firms’ financial–environmental priorities, these findings offer actionable insights for designing policies that better balance profitability and sustainability in the low-carbon transition.

Keywords: Carbon pricing; EU emissions trading system; Financial performance; Environmental performance; Predictive modeling (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:105:y:2025:i:c:s1057521925004351

DOI: 10.1016/j.irfa.2025.104348

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