Carbon Policy and Stock Returns: Signals from Financial Markets

By Martina Hengge, Ugo Panizza, Richard Varghese

January 27, 2023

Preview Citation

Format: Chicago

Martina Hengge, Ugo Panizza, and Richard Varghese. Carbon Policy and Stock Returns: Signals from Financial Markets, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Asset prices, Climate change, Climate policy, Emissions trading, Environment, Financial institutions, Greenhouse gas emissions, Prices, Stocks

Keywords: Asset prices, Carbon Emissions, Carbon intensity, Carbon policy, Carbon Policy surprise, Carbon Prices: Climate Change, Climate change, Climate mitigation policy, Climate policy, Emissions trading, EU Emissions Trading System, EU ETS, Europe, Global, Greenhouse gas emissions, Investors price, Stock return, Stock Returns, Stocks, Transition Risk

Publication Details

Pages:

34
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 2023/013
Stock No:

WPIEA2023013
ISBN:

9798400229329
ISSN:

1018-5941

FACTSHEETS

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers