The Impact of Carbon Price on Stock Market Returns: An Indian Experience

Abstract

The rapid industrialisation is unquestionably considered as a key to achieve higher economic growth and development in modern civilization today. But, this in turn leads to higher carbon emissions and other GHGs. Ever since the Industrial Revolution; human – induced anthropogenic activities have resulted in huge emission of the GHGs due to which global warming has become a serious concern. Undoubtedly, higher industrial outputs add to the country’s growth but captivating profits at the cost of nature should not be continued. However, in 1997, with the emergence of the Kyoto Protocol, both developed and developing economies started to treat this matter seriously. Under this protocol the carbon credit system was established that imposed quotas on countries having more carbon emissions. Ever since then, the developing countries with less carbon emission generated carbon credits. This carbon credit can be traded actively in the international market at a certain market price to those developed economies with more carbon emission above the cap limit. This led to a rise in the carbon market to boost both the sustainable and environmental friendly practices among entities. Corporations that can reduce emission generate carbon credit, the right of which can be sold to entities that are emitting more CO2 and GHGs. Does this in any way affect corporate valuation and share price? This paper attempts to study the relationship between Carbon emission price and Indian stock market performance for a period covering FY 2008 to FY 2010. The research used simple regression analysis to test the relationship between dependent variables (BSE GREEENEX, BSE INDUSTRIALS, PCBL Ltd., Rain Industries and Reliance Industries) and independent variables (Carbon emission prices). This research is purely based on secondary data collected from websites, journals and other sources. This paper also tries to highlight the trends in the carbon market in India during the period of study.