Carbon Emissions and Stock Returns: Evidence from the EU Emissions Trading Scheme
43 Pages Posted: 15 Dec 2012 Last revised: 12 May 2015
Date Written: May 11, 2015
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.
Keywords: European Union Emissions Trading Scheme, Carbon Emission Allowances, Carbon Risk, Stock Returns
JEL Classification: G12, G18, Q58
Suggested Citation: Suggested Citation