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Carbon emissions and stock returns: Evidence from the EU Emissions Trading Scheme

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  • Oestreich, A. Marcel
  • Tsiakas, Ilias

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.

Suggested Citation

  • Oestreich, A. Marcel & Tsiakas, Ilias, 2015. "Carbon emissions and stock returns: Evidence from the EU Emissions Trading Scheme," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 294-308.
    • Handle: RePEc:eee:jbfina:v:58:y:2015:i:c:p:294-308
    DOI: 10.1016/j.jbankfin.2015.05.005
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    More about this item

    Keywords

    European Union Emissions Trading Scheme; Carbon emission allowances; Carbon risk; Stock returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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