Do Carbon Prices Affect Stock Prices?

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