Carbon tax, corporate carbon profile and financial return

Abstract

Purpose

This paper aims to investigate the impact of the proposed carbon tax on the financial market return of Australian firms. It also considers the differential tax effect on individual firms with different carbon profiles, including factors such as emissions costs, carbon disclosure and climate-change policies.

Design/methodology/approach

Utilising the event-study method, the authors examine the market reaction to seven key carbon legislative information events that occurred from February 2011 to November 2011. The sample includes 48 different firms whose emissions-related data are available from Carbon Disclosure Project reports; thus, 336 firm-event observations are used for the cross-sectional analysis.

Findings

The paper documents evidence that the proposed tax has an overall negative impact on shareholder wealth as measured by abnormal returns. The negative impact varies across sectors, with the most significant effect found in the materials, industrial and financial sectors. It was also found that a firm’s direct carbon exposure (as measured by Scope 1 emissions) is significantly associated with abnormal returns, whereas the indirect exposure (as measured by Scope 2 emissions) is not, because Scope 2 emissions are not covered by the tax. In addition, the findings suggest that the information content of the events is more notable during the early stages of the development of the carbon tax.

Research limitations/implications

The sample is restricted to the largest firms with relevant carbon profile information. Thus, caution should be exercised when generalising the inferences.

Practical implications

The introduction of the carbon tax was largely unexpected and most firms were unprepared for it; thus, their carbon policy appears inadequate and does not impress investors. An understanding of how the carbon tax affects shareholder value and welfare will encourage management to take proactive actions to mitigate the compliance costs of carbon legislation.

Originality/value

The enactment of the Australian carbon tax perhaps represents one of the biggest social and economic restructuring events in the country’s history. Our results offer initial insight into its impact and suggest that investors would penalise firms with heavy direct operational emissions. In addition, Australian corporate carbon policy seems inadequate, so does not reverse the negative effect of the tax on the value of a firm.

Citation

Luo, L. and Tang, Q. (2014), "Carbon tax, corporate carbon profile and financial return", Pacific Accounting Review, Vol. 26 No. 3, pp. 351-373. https://doi.org/10.1108/PAR-09-2012-0046