Carbon Policy and Stock Returns: Signals from Financial Markets

39 Pages Posted: 8 Feb 2023 Last revised: 15 May 2024

See all articles by Martina Hengge

Martina Hengge

International Monetary Fund (IMF)

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics; CEPR

Richard Varghese

International Monetary Fund (IMF)

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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

JEL Classification: G14, G18, G32, G38, Q54, G23, E31, Q58, Q50

Suggested Citation

Hengge, Martina and Panizza, Ugo and Varghese, Richard, Carbon Policy and Stock Returns: Signals from Financial Markets. IMF Working Paper No. 2023/013, Available at SSRN: https://ssrn.com/abstract=4351445 or http://dx.doi.org/10.5089/9798400229411.001

Martina Hengge (Contact Author)

International Monetary Fund (IMF) ( email )

United States

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

CEPR

London
United Kingdom

Richard Varghese

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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