Do Carbon Prices Affect Stock Prices?

64 Pages Posted: 1 Mar 2023 Last revised: 12 Apr 2023

See all articles by Patrick Bolton

Patrick Bolton

Imperial College London; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Adrian Lam

University of Pittsburgh - Katz Graduate School of Business; University of Amsterdam - Amsterdam Center for Law & Economics (ACLE)

Mirabelle Muûls

Imperial College Business School and Grantham Institute - Climate Change and the environment; London School of Economics - Centre for Economic Performance

Date Written: April 4, 2023

Abstract

We explore how carbon pricing affects corporate financial performance. Our setting exploits time series changes in European carbon allowance prices and cross-sectional heterogeneity in carbon emissions during Phase 3 of the European Union Emissions Trading Scheme (EU ETS). We find that the relationship between carbon prices and stock prices depends critically on the proportion of verified emissions covered by emission permits: For firms with a significant shortfall in emissions allowances, an increase in daily carbon prices is associated with a decrease in contemporaneous stock prices. For firms with a greater permit coverage, an increase in daily carbon prices is associated with higher contemporaneous stock prices. We provide additional evidence that firms with a significant permit shortfall reduce regulated but not global emissions.

Keywords: Carbon pricing, stock prices, EU ETS

JEL Classification: G12, G30, Q54, Q58

Suggested Citation

Bolton, Patrick and Lam, Adrian and Muûls, Mirabelle, Do Carbon Prices Affect Stock Prices? (April 4, 2023). Available at SSRN: https://ssrn.com/abstract=4369925 or http://dx.doi.org/10.2139/ssrn.4369925

Patrick Bolton

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Adrian Lam (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

University of Amsterdam - Amsterdam Center for Law & Economics (ACLE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Mirabelle Muûls

Imperial College Business School and Grantham Institute - Climate Change and the environment ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

London School of Economics - Centre for Economic Performance ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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