Carbon pricing wouldn’t reduce value of all firms, ECB paper finds

January 19, 2024|Written by Moriah Costa|European Central Bank

Carbon pricing would not necessarily affect the value of all companies but would instead encourage firms to decrease their emissions, an analysis from the European Central Bank (ECB) found.

“Our analysis reveals that carbon regulation need not reduce firm value unconditionally, in spite of the perceived conflict between the interests of environmental regulators and those of businesses,” the authors wrote.

If implemented, carbon pricing is one strategy for regulators to reduce climate change, as it places a fee on emitting sectors or offers incentives for reducing emissions. Those opposed to carbon pricing argue it would have a negative impact on carbon-intensive industries and not help with a just transition to a green economy. But as climate change becomes more of an issue, more countries are looking at implementing carbon pricing.

The ECB working paper found that for firms with positive net emissions, or generate a lot of pollution, carbon regulation would be costly. This would in turn lower the value of the company and reduce its investments in green innovation compared to a laissez-faire approach.

In comparison, companies that have negative net emissions could gain value from selling credits or rewards. In other words, carbon regulation would raise the value of companies that engage in innovation and reduce their emissions, the paper found.

The authors also found that carbon pricing leads to companies decreasing their emissions by reducing production scales and engaging in green investment.

Firms that are more polluting tend to tilt their green investments towards more short-term solutions as carbon pricing becomes costlier. While this would reduce a company’s expected cost of carbon pricing, it would slow down the introduction of green technology.

To mitigate this, regulators can complement carbon pricing with green innovation subsidies.

“Such subsidies not only stir a greater engagement in green investment, but also tilt the mix in favor of green innovation,” the authors wrote.

The authors noted that their research was broad and that they intended to conduct further research, in particular “to further uncover how the firms’ new need to manage emissions can affect existing theories on corporate decision making”.

This page was last updated January 19, 2024

Share this article