The Cost of Carbon: Capital Market Effects of the Proposed Emission Trading Scheme (ETS)

Abstract

The Australian Government has announced its intention to introduce a national Emissions Trading Scheme (ETS), now expected in 2011. This study, the first empirical study into pricing effects, investigates the impact of ETS on the market valuation of Australian Securities Exchange (ASX) firms. We hypothesise that firm value will be negatively related to its carbon intensity profile. Using a sample of 58 listed firms during 2007, based on event study methodology, we initially find that the market indeed prices the proposed ETS. Second, using a modified Ohlson (1995) valuation model, we find a market decrement for high intensity firms, relative to other sample firms, of between 7% and 10% of market capitalisation.

Keywords: emissions trading scheme, ETS, cost of carbon, environmental liabilities, market valuation

JEL Classification: G14, G18, K32, O16, Q51