Carbon Emissions and Shareholder Value: Causal Evidence from the U.S. Power Utilities
55 Pages Posted: 22 Nov 2022 Last revised: 9 May 2024
Date Written: November 17, 2022
Abstract
We establish a causal link between carbon emissions and firm performance using the passage of a cap-and-trade policy, the Regional Greenhouse Gas Initiative, for electric utilities in Northeastern and Mid-Atlantic states. The policy was successful in reducing carbon emissions from the affected plants compared to the unaffected ones. The affected firm’s profitability decreased, yet they experienced an increase in market-to-book ratio. Increase in value came from higher expected cash flows and increased demand of the affected firms’ stocks by environmentally focused institutional investors. Our results suggest that managerial focus on short-term profitability can be a significant impediment to carbon-transition.
Keywords: cap-and-trade, carbon emissions, pollution, stakeholder capitalism, shareholder value
JEL Classification: G21, G28
Suggested Citation: Suggested Citation