Carbon Emissions and Stock Returns: Evidence from the EU Emissions Trading Scheme

43 Pages Posted: 15 Dec 2012 Last revised: 12 May 2015

See all articles by Andreas Marcel Oestreich

Andreas Marcel Oestreich

Brock University - Department of Economics

Ilias Tsiakas

University of Guelph

Date Written: May 11, 2015

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.

Keywords: European Union Emissions Trading Scheme, Carbon Emission Allowances, Carbon Risk, Stock Returns

JEL Classification: G12, G18, Q58

Suggested Citation

Oestreich, Andreas Marcel and Tsiakas, Ilias, Carbon Emissions and Stock Returns: Evidence from the EU Emissions Trading Scheme (May 11, 2015). Available at SSRN: https://ssrn.com/abstract=2189497 or http://dx.doi.org/10.2139/ssrn.2189497

Andreas Marcel Oestreich

Brock University - Department of Economics ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Ilias Tsiakas (Contact Author)

University of Guelph ( email )

Department of Economics and Finance
University of Guelph
Guelph, Ontario N1G 2W1
Canada
5198244120 ext 53054 (Phone)
5197638497 (Fax)

HOME PAGE: http://www.uoguelph.ca/~itsiakas

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