The Carrot and the Stock: In Search of Stock-Market Incentives for Decarbonization – International Monetary Fund

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Author/Editor:
Laurent Millischer ; Tatiana Evdokimova ; Oscar Fernandez
Publication Date:
November 18, 2022
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Disclaimer: 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.
Summary:
Financial markets can support the transition to a low-carbon economy by redirecting funds from highly emissive to clean investments. We study whether European stock markets incorporate carbon prices in company valuations and to what degree they discriminate between firms with different carbon intensities. Using a novel dataset of stock prices and carbon intensities of 338 European publicly traded companies between 2013 and 2021, we find a strongly statistically significant relationship between weekly carbon price changes and stock returns. Crucially, this relationship depends on firms’ carbon intensity: the higher the carbon costs a firm faces, the poorer its stock performance during the periods of carbon price increases. Emissions covered with free allowances however do not affect this relationship, illustrating how both carbon pricing and disclosures are needed for financial markets to foster climate change mitigation. The relationship we identify can provide an incentive for firms to decarbonize. We argue in favor of more ambitious carbon pricing policies, as this would strengthen the stock-market incentive channel while causing only limited financial stability risk for stocks.
Series:
Working Paper No. 2022/231
Frequency:
regular
Publication Date:
November 18, 2022
ISBN/ISSN:
9798400224805/1018-5941
Stock No:
WPIEA2022231
Pages:
56
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