The Valuation Relevance of Greenhouse Gas Emissions Under the European Union Carbon Emissions Trading Scheme

46 Pages Posted: 9 May 2014

See all articles by Peter Clarkson

Peter Clarkson

University of Queensland - Business School; Simon Fraser University (SFU) - Beedie School of Business; Financial Research Network (FIRN)

Yue Li

University of Toronto - Joseph Rotman School of Management

Matt Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems

Gordon D. Richardson

University of Toronto - Rotman School of Management

Date Written: May 7, 2014

Abstract

This study examines the valuation relevance of greenhouse gas emissions under the European Union Carbon Emission Trading Scheme (EU ETS). We posit that carbon emissions affect firm valuation only to the extent that a firm’s emissions exceed its carbon allowances under a cap and trade system and the extent of its inability to pass on carbon related compliance costs to consumers and end users. We measure a firm’s ability to pass on the future costs by its market power and its carbon performance relative to its industry peers. The results show that firms’ carbon allowances are not associated with firm valuation but the allocation shortfalls are negatively associated. We also find that the negative association between firm values and carbon emission shortfalls is mitigated for firms with better carbon performance relative to their industry peers and for firms in less competitive industry sectors. These findings, which suggest that the valuation impact of carbon emissions is unlikely to be homogenous across firms or industrial sectors, have important implications for future research design and for the disclosure and recognition of a firm’s greenhouse gas liabilities.

Keywords: carbon (GHG) emissions; EU emissions trading scheme; market valuation

JEL Classification: G14; M14; Q51

Suggested Citation

Clarkson, Peter and Li, Yue and Pinnuck, Matthew and Richardson, Gordon D., The Valuation Relevance of Greenhouse Gas Emissions Under the European Union Carbon Emissions Trading Scheme (May 7, 2014). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2434336

Peter Clarkson (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Yue Li

University of Toronto - Joseph Rotman School of Management ( email )

Joseph Rotman School of Management
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-978-0857 (Phone)
416-971-3048 (Fax)

Matthew Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia

Gordon D. Richardson

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8601 (Phone)
416-971-3048 (Fax)

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