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

Listed author(s):
  • A. Marcel Oestreich

    ()

    (Department of Economics, Brock University, Canada)

  • Ilias Tsiakas

    ()

    (Department of Economics and Finance, University of Guelph, Canada; The Rimini Centre for Economic Analysis, Italy)

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.

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File URL: http://www.rcfea.org/RePEc/pdf/wp15-18.pdf
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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 15-18.

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Date of creation: May 2015
Handle: RePEc:rim:rimwps:15-18
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  25. repec:dau:papers:123456789/10174 is not listed on IDEAS
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