Cross-border carbon taxes and shareholder wealth

Abstract

This paper explores the effect of cross-border carbon taxes on shareholder wealth. For identification, we analyze stock price reactions to news about the introduction of the Carbon Border Adjustment Mechanism (CBAM) in the EU. We find that stock prices of EU importers of CBAM products respond more negatively to the announcement of the CBAM than those of similar non-European firms. The results from cross-sectional tests support the interpretation that the documented patterns reflect EU firms’ limited ability to pass on the tax cost in commercial relations with non-EU counterparts. Collectively, our results shed doubt on the ability of cross-border carbon taxes to level the playing field between local and foreign firms.

Keywords: Carbon pricing, market reactions, border adjustment, climate regulation

JEL Classification: H2, Q5, F1