Carbon emissions and shareholder value: Causal evidence from the u.s. power utilities

Abstract

carbon emissions and shareholder value: causal evidence from the u.s. power utilities∗ mayank kumar† amiyatosh purnanandam‡ first draft: october, 2022 this draft: january 8, 2023 abstract we establish a causal link between carbon emissions and shareholder value using the passage of the regional greenhouse gas initiative (rggi) that imposed a cap-and-trade policy for carbon emission on electric utilities in several northeastern and mid-atlantic states. the regulation was successful in significantly bringing down the level of co2 emission from plants located in the rggi states compared to unaffected plants. the affected plant’s revenue and profitability decreased after the rggi as they transitioned to cleaner technology. publicly traded power utility companies in the affected states experienced a drop in their profitability as well. yet, they had a higher market-to-book ratio after the implementation of the initiative. increase in value came from an increase in the expected future cash flows of the treated firms and increasing demand of these stocks by institutional funds focused on environmental goals. our results show that short-term focus on profitability may be a significant impediment to carbon transition. keywords: cap-and-trade, carbon emission, pollution, stakeholder value, capitalism jel classification: g21, g28 ∗we are grateful to carlos acuna silva, thomas flanagan, todd gormley, arpit gupta, marcin kacperczyk, song ma, andrey malenko, uday rajan, and parinitha …

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