The Carrot and the Stock: In Search of Stock-Market Incentives for Decarbonization

53 Pages Posted: 13 Dec 2022 Last revised: 23 Aug 2023

See all articles by Laurent Millischer

Laurent Millischer

Joint Vienna Institute

Tatiana Evdokimova

Joint Vienna Institute

Oscar Fernandez

Vienna University of Economics and Business; Institute for Advanced Studies (IHS)

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Financial markets can support the transition to a low-carbon economy by redirecting funds from highly emissive to clean investments. We study whether European stock markets take carbon prices into account in company valuations and to what degree they discriminate between firms with different carbon intensities. Using a novel dataset containing stock prices and carbon intensities of 338 European publicly traded companies between 2013 and 2021, we find a strongly statistically significant relationship between weekly carbon price changes and stock returns. Crucially, this relationship depends on firms’ carbon intensity: the higher the carbon costs a firm faces, the poorer its stock performance during the periods of carbon price increases. Emissions that firms cover with free allowances however do not impact this relationship, illustrating how, in the absence of carbon pricing, data disclosure alone might not be sufficient for financial markets to support climate change mitigation. The relationship we identify can provide an incentive for firms to decarbonize. We argue in favor of more ambitious carbon pricing policies, as this would strengthen the stock-market incentive channel while causing only limited financial stability risk for stocks.

Keywords: European Union Emissions Trading Scheme, Carbon price, Stock price valuation, ClimateFinance, climate change mitigation, Multifactor Market Model

Suggested Citation

Millischer, Laurent and Evdokimova, Tatiana and Fernandez, Oscar, The Carrot and the Stock: In Search of Stock-Market Incentives for Decarbonization. Available at SSRN: or

Laurent Millischer (Contact Author)

Joint Vienna Institute ( email )

Tatiana Evdokimova

Joint Vienna Institute ( email )

Mariahilferstrasse 97
Vienna, A-1060

Oscar Fernandez

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, 1020

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
1080 Vienna

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