We study how the EU Emissions Trading System (EU ETS) affects the stock prices of regulated firms. Using historically representative ownership measures for more than 15,000 installations required to comply with the EU ETS, we construct a comprehensive data set of allocated allowances and verified emissions aggregated to the parent company. Our empirical strategy exploits the release of compliance information in the EU ETS, changes in the European carbon allowance price in combination with cross-sectional variation in the ratio of allocated allowances to verified emissions, and a high-frequency identification approach around regulatory announcements to rule out any potential confounding effects. Our findings point towards a robust influence of carbon prices on stock prices starting from Phase II of the EU ETS in 2008. We find that the transmission of carbon prices to stock prices is not limited to European firms that are relatively heavily regulated by the system but also applies to non-European firms that are regulated to a lesser extent. Our findings challenge the notion that carbon pricing mainly affects company valuations via the profitability channel and lend support to an alternative explanation that is risk-based.
