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The influence of carbon cost pass through on the link between carbon emission and corporate financial performance in the context of the European Union Emission Trading Scheme
Author(s) -
Brouwers Roel,
Schoubben Frederiek,
Van Hulle Cynthia
Publication year - 2018
Publication title -
business strategy and the environment
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.123
H-Index - 105
eISSN - 1099-0836
pISSN - 0964-4733
DOI - 10.1002/bse.2193
Subject(s) - emissions trading , context (archaeology) , business , european union , carbon fibers , scheme (mathematics) , environmental economics , greenhouse gas , economics , economic policy , computer science , ecology , paleontology , algorithm , composite number , biology , mathematical analysis , mathematics
In this study we examine, within the context of the European Union Emission Trading Scheme, whether firms' ability to pass through carbon costs affects the link between carbon emission and corporate financial performance. Our results, controlling for the endogenous relationship between carbon emission and financial performance, and robust to a number of alternative financial performance measures, demonstrate that good carbon emission performance does not always pay off. In fact, we find that lower levels of carbon emission are only rewarded if firms are not able to pass on carbon costs to consumers, either due to industry characteristics or firm‐specific carbon efficiency. Our results are in line with the view that as pollution is associated with increasing environmental costs, this negative impact of pollution on financial performance is mitigated for “carbon cost pass through” firms.