Carbon emissions and stock returns: Evidence from the EU Emissions Trading Scheme |
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| Institution: | 1. Department of Economics, Brock University, St. Catharines Ontario L2S 3A1, Canada;2. Department of Economics and Finance, University of Guelph, Guelph Ontario N1G 2W1, Canada;1. Stockholm Business School, Stockholm University, Stockholm, Sweden;2. University of Chinese Academy of Sciences, No.80, Zhongguancun East Road Haidian District, Beijing, 100190, China;1. School of Economics and Management, North China Electric Power University, Beijing 102206, China;2. Research Institute of Climate Change and Energy Development, North China Electric Power University, Beijing 102206, China;1. School of Accounting and Finance, University of Vaasa, Finland;2. Holy Spirit University of Kaslik, Lebanon;3. American International University-Bangladesh, Bangladesh |
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| Abstract: | This paper provides an empirical investigation of the effect of the European Union’s Emissions Trading Scheme on German stock returns. We find that, during the first few years of the scheme, firms that received free carbon emission allowances on average significantly outperformed firms that did not. This suggests the presence of a large and statistically significant “carbon premium,” which is mainly explained by the higher cash flows due to the free allocation of carbon emission allowances. A carbon risk factor can also explain part of the cross-sectional variation of stock returns as firms with high carbon emissions have higher exposure to carbon risk and exhibit higher expected returns. |
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| Keywords: | European Union Emissions Trading Scheme Carbon emission allowances Carbon risk Stock returns |
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