Carbon VIX: Carbon Price Uncertainty and Decarbonization Investments

Maximilian Fuchs, Ströbel, Johannes and Julian Terstegge

No 19349, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the effects of carbon price uncertainty on firms’ decisions to decarbonize their operations. We first use information on the pricing of options on emission allowances in the European Emissions Trading System to create the Carbon VIX, a market-based high-frequency measure of carbon price uncertainty. Carbon price uncertainty is high, varies substantially over time, and experiences persistent shocks around major climate policy events. To explore the effects of carbon price uncertainty on expected aggregate decarbonization investments, we analyze its effect on the stock returns of firms that help other businesses decarbonize. To identify these “carbon solution providers,†we extract common types of decarbonization investments from a large survey of firms, and then identify companies that offer the associated goods and services. We find that the stock returns of these carbon solution providers vary positively with carbon prices, but negatively with carbon price uncertainty. The effect of increases in carbon price uncertainty on our proxy for expected decarbonization investments is economically large and of similar magnitude as the effect of declines in carbon prices. These findings support predictions from real options theory that firms may delay investments in decarbonization when faced with uncertainty about the future costs of emissions.

Keywords: Emissions; Uncertainty; Investments (search for similar items in EconPapers)
JEL-codes: G1 G3 Q4 Q5 (search for similar items in EconPapers)
Date: 2024-08
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP19349 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:19349

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP19349

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().