The Effect of Carbon Pricing on Firm Performance

Carbon pricing is considered as one of the most cost-effective ways to reduce carbon emissions. However, a major block to pricing carbon pollution is the concern about the economic costs. This paper examines the impacts of carbon pricing initiatives on the operating performance and market value of publicly listed firms around the world. Using staggered enactment of carbon pricing initiatives across jurisdictions and a triple difference approach, we find a significant reduction in the profitability and value of carbon-intensive firms relative to low-emission firms after the enactment of carbon pricing policies. The reduction in firm profits is driven by both a decrease in sales growth and an increase in operating costs. The reduction in firm value is driven by both an increase in the cost of capital and a decrease in expected future cash flows. Carbon-intensive firms also cut investments and lay off employees more, and hold more cash, indicating tightened financial constraints. Cross-country analyses show a stronger effect for firms headquartered in North America and in countries that rely more on fossil fuel energy. Overall, our findings uncover the large distributional impacts of carbon pricing policies on individual firms and complement prior studies documenting an insignificant effect on the macroeconomy.