Carbon Emissions and Shareholder Value : Causal Evidence from the U.S. Power Utilities

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. Consistent with the idea of a preference for clean stocks, the ESG funds increased their shareholdings in these utilities. Our results show that markets can play an important role in conjunction with regulatory interventions in facilitating green transition, and a part of loss in shareholder profits get compensated by investors' preference for green firms