Carbon Policy and Stock Returns: Signals from Financial Markets

Martina Hengge, Ugo Panizza and Richard Varghese

No 2023/013, IMF Working Papers from International Monetary Fund

Abstract: This paper uses institutional features of the EU Emissions Trading System (ETS) and highfrequency data on more than 2,000 publicly listed European firms over 2011–21 to study the impact of carbon policy on stock returns. After extracting the surprise component of regulatory actions, we show that events resulting in a higher carbon price lead to negative returns for firms with high emission intensities. This negative relationship is even stronger for firms in sectors which do not participate in the EU ETS. Taken together, our results indicate 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; carbon Policy surprise; investors price; carbon intensity; climate mitigation policy; EU ETS; Greenhouse gas emissions; Stocks; Asset prices; Climate change; Europe; Global; Emissions trading; stock return; carbon policy; EU Emissions Trading System; Climate policy (search for similar items in EconPapers)
Pages: 34
Date: 2023-01-27
New Economics Papers: this item is included in nep-ene, nep-env and nep-fmk
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Citations: View citations in EconPapers (5)

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