DP17868 Carbon Policy Surprises and Stock Returns: Signals from Financial Markets
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.
