“IS DECARBONIZATION PRICED IN?”—EVIDENCE ON THE CARBON RISK HYPOTHESIS FROM THE EUROPEAN GREEN DEAL LEAKAGE SHOCK

Abstract

On November 29, 2019, 12 days before its announcement, information on the ambitions of the European Green Deal was leaked. The leakage should have triggered a Europe-wide systemic shock to financial markets without an accompanying announcement of supportive measures. Applying event study methodology to a sample of 600 European large and mid-cap stocks, we find that the overall market reaction was indeed significantly negative, albeit moderate. Abnormal returns gradually decline with increasing greenhouse gas emissions levels. Conversely, the official announcement emphasizing financial support and the green growth narrative did not ignite a positive market reaction. The results are largely robust in multivariate regressions. We conclude that market participants incorporate available emissions information into (short-term) reassessments after a significant change in environmental policy becomes known.