Abstract: We quantify the U.S. corporate sector's carbon externality by computing the sector's ``carbon burden"---the present value of social costs of its future carbon emissions. Our baseline estimate of the carbon burden is 131% of total corporate equity value. Among individual firms, 77% have carbon burdens exceeding their market capitalizations, as do 13% of firms even with indirect emissions omitted. The 30 largest emitters account for all the decarbonization of U.S. corporations predicted by 2050. Predicted emission reductions, and even firms' targets, fall short of the Paris Agreement. Firms' emissions are predictable by past emissions, investment, climate score, and book-to-market.
Abstract: Using rich hand-collected data, we examine how corporations use carbon offset credits issued by third-party developers to claim emission reductions. Larger firms with higher institutional ownership and net-zero commitments tend to use offsets. However, offsets are used intensively in low-emission industries. After an exogenous ESG ratingdowngrade, triggered by a leading ESG rating agency’s methodology change, low-emission firms retire larger quantities of cheap, low-quality offsets while heavy emitters decarbonize more in-house. Our findings are consistent with a separating equilibrium where firms choose whether to outsource their transition efforts, but also with firmsusing offsets strategically for certification and ranking benefits.
Discussant: Samuel Kruger, University of Texas-Austin
Abstract: Prior research has documented a carbon premium in realized returns, which have been assumed to proxy for expected returns and thus the cost of capital. We find that the carbon premium partially represents unexpected returns and thus outperformance. Companies with higher scope 1, scope 2, or scope 3 emissions enjoy superior earnings surprises and earnings announcement returns; quarterly earnings announcements account for 30-50% of the premium. When adding in announcement returns to events related to earnings calls, earnings guidance, dividends, and buybacks, this proportion rises to 40-65%. We find similar results for changes in emissions but not scaled emissions, consistent with earlier findings on realized returns. Our results suggest that the carbon premium, where it exists, partially results from an unpriced externality, highlighting the need for government action.
