The cost of carbon: capital market effects of the proposed Emission Trading Scheme (ETS)

Chapple, Larelle, Clarkson, Peter M. and Gold, Daniel L. (2013) The cost of carbon: capital market effects of the proposed Emission Trading Scheme (ETS). Abacus, 49 1: 1-33. doi:10.1111/abac.12006

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Author Chapple, Larelle
Clarkson, Peter M.
Gold, Daniel L.
Title The cost of carbon: capital market effects of the proposed Emission Trading Scheme (ETS)
Journal name Abacus   Check publisher's open access policy
ISSN 0001-3072
Publication date 2013-03
Year available 2013
Sub-type Article (original research)
DOI 10.1111/abac.12006
Open Access Status
Volume 49
Issue 1
Start page 1
End page 33
Total pages 33
Place of publication Richmond, VIC, Australia
Publisher Wiley-Blackwell
Collection year 2014
Language eng
Abstract In March 2008, the Australian Government announced its intention to introduce a national Emissions Trading Scheme (ETS), now expected to start in 2015. This impending development provides an ideal setting to investigate the impact an ETS in Australia will have on the market valuation of Australian Securities Exchange (ASX) firms. This is the first empirical study into the pricing effects of the ETS in Australia. Primarily, we hypothesize that firm value will be negatively related to a firm's carbon intensity profile. That is, there will be a greater impact on firm value for high carbon emitters in the period prior (2007) to the introduction of the ETS, whether for reasons relating to the existence of unbooked liabilities associated with future compliance and/or abatement costs, or for reasons relating to reduced future earnings. Using a sample of 58 Australian listed firms (constrained by the current availability of emissions data) which comprise larger, more profitable and less risky listed Australian firms, we first undertake an event study focusing on five distinct information events argued to impact the probability of the proposed ETS being enacted. Here, we find direct evidence that the capital market is indeed pricing the proposed ETS. Second, using a modified version of the Ohlson () valuation model, we undertake a valuation analysis designed not only to complement the event study results, but more importantly to provide insights into the capital market's assessment of the magnitude of the economic impact of the proposed ETS as reflected in market capitalization. Here, our results show that the market assesses the most carbon intensive sample firms a market value decrement relative to other sample firms of between 7% and 10% of market capitalization. Further, based on the carbon emission profile of the sample firms we imply a ‘future carbon permit price’ of between AUD$17 per tonne and AUD$26 per tonne of carbon dioxide emitted. This study is more precise than industry reports, which set a carbon price of between AUD$15 to AUD$74 per tonne.
Keyword Cost of carbon
Emissions trading scheme
Environmental liabilities
Market valuation
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2014 Collection
UQ Business School Publications
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Citation counts: TR Web of Science Citation Count  Cited 17 times in Thomson Reuters Web of Science Article | Citations
Scopus Citation Count Cited 21 times in Scopus Article | Citations
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Created: Wed, 20 Feb 2013, 14:28:30 EST by Karen Morgan on behalf of UQ Business School