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

Author

Listed:
  • 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)

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

  • A. Marcel Oestreich & Ilias Tsiakas, 2015. "Carbon Emissions and Stock Returns: Evidence from the EU Emissions Trading Scheme," Working Paper series 15-18, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:15-18
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Yongrok Choi & Hyoung Seok Lee, 2016. "Are Emissions Trading Policies Sustainable? A Study of the Petrochemical Industry in Korea," Sustainability, MDPI, Open Access Journal, vol. 8(11), pages 1-13, October.
    2. repec:gam:jsusta:v:9:y:2017:i:6:p:1028-:d:101610 is not listed on IDEAS
    3. repec:gam:jsusta:v:9:y:2017:i:11:p:2122-:d:119248 is not listed on IDEAS
    4. repec:gam:jeners:v:9:y:2016:i:5:p:329:d:69380 is not listed on IDEAS
    5. repec:gam:jsusta:v:10:y:2018:i:1:p:154-:d:126289 is not listed on IDEAS
    6. Deshan Li & Degang Yang, 2016. "Does Non-Fossil Energy Usage Lower CO 2 Emissions? Empirical Evidence from China," Sustainability, MDPI, Open Access Journal, vol. 8(9), pages 1-11, August.
    7. repec:gam:jeners:v:10:y:2017:i:8:p:1164-:d:107410 is not listed on IDEAS
    8. repec:gam:jsusta:v:9:y:2017:i:5:p:837-:d:98883 is not listed on IDEAS
    9. Baochen Yang & Chuanze Liu & Yunpeng Su & Xin Jing, 2017. "The Allocation of Carbon Intensity Reduction Target by 2020 among Industrial Sectors in China," Sustainability, MDPI, Open Access Journal, vol. 9(1), pages 1-19, January.
    10. repec:gam:jsusta:v:9:y:2017:i:4:p:667-:d:96528 is not listed on IDEAS
    11. repec:gam:jsusta:v:10:y:2018:i:1:p:173-:d:126695 is not listed on IDEAS
    12. Yinpeng Zhang & Zhixin Liu & Xueying Yu, 2017. "The Diversification Benefits of Including Carbon Assets in Financial Portfolios," Sustainability, MDPI, Open Access Journal, vol. 9(3), pages 1-13, March.
    13. repec:gam:jsusta:v:9:y:2017:i:10:p:1747-:d:113547 is not listed on IDEAS
    14. Shihong Zeng & Yan Xu & Liming Wang & Jiuying Chen & Qirong Li, 2016. "Forecasting the Allocative Efficiency of Carbon Emission Allowance Financial Assets in China at the Provincial Level in 2020," Energies, MDPI, Open Access Journal, vol. 9(5), pages 1-18, May.
    15. Wei Jiang & Jia Liu & Xiang Liu, 2016. "Impact of Carbon Quota Allocation Mechanism on Emissions Trading: An Agent-Based Simulation," Sustainability, MDPI, Open Access Journal, vol. 8(8), pages 1-13, August.

    More about this item

    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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