The study by researchers from the University of Wisconsin, University of Notre Dame and Georgetown University found that the negative correlation between emissions and value translates into a total value penalty of $1.28 billion for firms in the third quartile of emitters, relative to firms in the first quartile.
The authors note that this economic effect is large, considering that the direct costs of carbon emissions have recently been less than $40 per metric ton. The indirect costs of emissions, such as increased regulation, litigation, remediation and reputation impacts, are likely to be significant, they said.
“Our results suggest that the market attaches an implicit cost to carbon emissions, even though there is currently no explicit cost,” the authors wrote. “This evidence is consistent with capital markets rewarding firms that reduce their carbon emissions.”
The research found that the negative association between emissions and value applies to high and low-emitting firms. It applies both to industries required to report their emissions to the Environmental Protection Agency (labeled EPA=1 on the chart) and those that are not required to do so (EPA=0).
The authors said their study corrects for self-selection bias, making up for the fact that it could only consider emissions for firms that chose to disclose them. The study also controls for a number of factors expected to affect firms’ market value, such as assets and liabiliites.
“The results have significant implications, as federal regulation requiring companies to pay for their carbon emissions continues to be debated,” University of Notre Dame accountancy professor and report co-author Sandra Vera-Muñoz said. “Although regulation has yet to be adopted, our results suggest that the markets are already anticipating the effects of the costs of emissions on firm value.”
The study also confirmed the authors’ prediction that firms with superior environmental performance are more likely to disclose their carbon emissions. Firms are also more likely to voluntarily disclose their emissions if their competitors are doing so.
But contrary to their predictions, they found no association between inferior environmental performance and the likelihood of disclosure.
In future research, the authors plan to examine managers’ decisions to request verification or assurance of their carbon emissions, as well as their choice of assurance provider.
A video interview with Sandra Vera-Muñoz is available here.