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© 2023 International Monetary Fund
WP/23/13
IMF Working Paper
Strategy, Policy, and Review Department
Carbon Policy Surprises and Stock Returns: Signals from Financial Markets
Prepared by Martina Hengge, Ugo Panizza, and Richard Varghese*
Authorized for distribution by Martin Cihak
January2023
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.
ABSTRACT: Understanding the impact of climate mitigation policies is key to designing effective carbon pricing tools. We use institutional features of the EU Emissions Trading System (ETS) and high-frequency data on more than 2,000 publicly listed European firms over2011–21 to study the impact of carbon policies on stock returns. After extracting the surprise component of regulatory actions, we show that events resulting in higher carbon prices lead to negative abnormal returns which increase with a firm’s carbon intensity. This negative relationship is even stronger for firms in sectors which do not participate in the EU ETS suggesting that investors price in transition riskstemming from the shifttowards a low-carbon economy. We conclude that policies which increase carbon prices are effective in raising the cost of capital for em ission-intensive firms.
| JEL Classification Numbers: | G12;G14;G18;G32;G38:Q54 |
| Keywords: | Carbon Emissions; Carbon Prices: Climate Change; Transition Risk; Stock Returns |
| Author’s E-Mail Address: | mhenqqe@Jmf.orq;uqo.panizza@.qraduateinstitute.ch; rvarqhese(5)imf.oro |
| JEL Classification Numbers: | G12;G14;G18;G32;G38:Q54 |
| Keywords: | Carbon Emissions; Carbon Prices: Climate Change; Transition Risk; Stock Returns |
| Author’s E-Mail Address: | mhenqqe@Jmf.orq;uqo.panizza@.qraduateinstitute.ch; rvarqhese(5)imf.oro |
Title page
WORKING PAPERS
Carbon Policy Surprises and Stock Returns: Signals from Financial Markets
Prepared by Martina Hengge, Ugo Panizza, and Richard Varghese
Title page
Carbon Policy Surprises and Stock Returns: Signals from Financial Markets
Martina Hengge IMF
Ugo Panizza Geneva Graduate Institute & CEPR
Richard Varghese IMF
January 2023*
Abstract
Understanding the impact of climate mitigation policies is key to designing effective carbon pricing tools. We use institutional features of the EU Emissions Trading System (ETS) and high-frequency data on more than 2,000 publicly listed European firms over 2011–21 to study the impact of carbon policies on stock returns. After extracting the surprise component of regulatory actions, we show that events resulting in higher carbon prices lead to negative abnormal returns which increase with a firm’s carbon intensity. This negative relationship is even stronger for firms in sectors which do not participate in the EU ETS suggesting 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.
Keywords: Carbon Emissions; Carbon Prices; Climate Change; Transition Risk; Stock Returns
JEL Codes: G12; G14; G18; G32; G38; Q54
We would like to thank Bruno Albuquerque, Patrick Bolton, Martin Cihak, Torsten Ehlers, Niels-Jakob Hansen, Zeina Hasna, Diego Kanzig, Divya Kirti, Marco Pani, HenkReinders, Fabian Valencia, and IMF seminarparticipantsforuseful comments and suggestions.
Contact information: nihengge@inif.org; ugo.panizza@graduateinstitute.ch; and rvarghese@imf.org. We would like to thank Bruno Albuquerque, Patrick Bolton, Martin Cihak, Torsten Ehlers, Niels-Jakob Hansen, Zeina Hasna, Diego Kanzig, Divya Kirti, Marco Pani, Henk Reinders, Fabian Valencia, and IMF seminar participants for useful comments and suggestions. The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF Management.