The Rudd Labor Government plans to introduce a national Emissions Trading Scheme (ETS) in Australia, which is expected to start in 2010.
When emissions trading in Australia becomes a reality, any domestic assets which increase a company's emission profile will increase the carbon liability of that firm. A material impact on company valuations is likely to result.
This thesis investigates whether the share market negatively assesses the existence of unbooked future liabilities - emissions abatement and/or permit spending obligations - for carbon intensive firms.
A modified version of the Ohlson (1995) valuation model is used for testing purposes and is followed by an event study to provide further insights. The event study examines the stock market reaction of carbon intensive firms on key regulatory event dates.
Data comes from relevant responses to the Carbon Disclosure Project (CDP) and expert industry estimates where such responses are unavailable.
Related research is beginning to attract mainstream financial services companies. Notwithstanding, the connection between emissions trading and company valuation is relatively unexplored in an academic context. This study adds to the Australian literature, which to this point only assesses the carbon risk exposures of ASX firms (Citigroup, 2006; Citigroup, 2008; VicSuper, 2007) and key Australian industries (Investor Group on Climate Change, 2007). The author is unaware of any research which investigates the extent to which corporate greenhouse gas (GHG) emissions data is being impounded in share prices.
Despite earnings impacts unlikely to be felt until scheme implementation, the study concludes that the financial impact of an ETS on certain carbon intensive ASX companies will be material. Average unbooked liabilities are found to be at least 3.37% of market capitalisation which is inline with recent professional estimates. This equates to an implied "cost of carbon" of at least AUD29/tonne of carbon dioxide equivalent.
If follows that price pass-through and Government assistance may be inadequate to fully shelter firms in their adjustment to a low-carbon economy. Emissions reporting, disclosure and due diligence will each increase in importance and it will become increasingly necessary for these issues to be understood both by firms themselves and from an investment perspective.
This research is intended as an early study to address a topical and fast-growth area. Limitations are acknowledged however numerous research opportunities are also identified. Further work will facilitate a smoother transition to emissions trading. While uncertainty remains, those proactive in this area are likely to gain a relative advantage.