Does Monetary Policy Shape the Path to Carbon Neutrality?

56 Pages Posted: 3 Oct 2023 Last revised: 4 Oct 2023

See all articles by Robin Döttling

Robin Döttling

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Adrian Lam

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

Date Written: September 25, 2023

Abstract

This paper empirically examines the interaction between monetary policy and carbon transition risk. Using an event study design, we find that the stock prices of firms with higher carbon emissions are more responsive to monetary policy shocks identified from high-frequency movements in Fed Funds futures around Federal Open Market Committee (FOMC) announcements. Cross-sectional tests reveal that this effect is driven by firms that are more capital intensive, with lower ESG ratings, with greater climate risk exposures, or without climate abatement plans. Using instrumental-variable local projections, we find that high-emission firms reduce emissions relative to low-emission firms, but slow down these efforts when monetary policy is restrictive. Taken together, our results indicate that monetary policy shapes the path to carbon neutrality irrespective of whether central banks embrace a climate target.

Keywords: Carbon transition risk, monetary policy, firm valuation

JEL Classification: G12, G38, E52

Suggested Citation

Döttling, Robin and Lam, Adrian, Does Monetary Policy Shape the Path to Carbon Neutrality? (September 25, 2023). Available at SSRN: https://ssrn.com/abstract=4582767 or http://dx.doi.org/10.2139/ssrn.4582767

Robin Döttling

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-46
3000 DR Rotterdam, 3000 DR
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
340
Abstract Views
868
Rank
158,946
PlumX Metrics