Finance and Accounting Research Seminar - Pat Akey (ESSEC Business School) "Do carbon markets undermine private climate initiatives?

We study the relationship between firms’ emission reductions and their trading of carbon allowances
in the secondary market under the European Union Emissions Trading System (EU
ETS), the world’s largest cap-and-trade program. Firms that cut emissions surrender fewer
allowances, as required, but also sell more allowances on the secondary market. These sales
shift the right to pollute to other firms, potentially leaving aggregate emissions unchanged. We
find no evidence of reductions outside the EU or of investments in green technologies. Emission
cuts are associated with higher ESG scores, creating potential benefits for firms. Our results
suggest that secondary market behavior is critical to assessing firms’ aggregate climate impact.