When the Remedy Is Worse Than the Illness
Carbon Performance and Growth Opportunities Under the EU ETS
Bibliographic Data
| ID | 22418322 |
|---|---|
| Authors | Adrián Ferreras (0000-0002-6524-9662, Facultad de Ciencias Económicas y Empresariales Universidad de León León Spain, corresponding author) |
| Year | 2026 |
| Publication date | 2026-03-12 |
| Open Access | Yes |
| Type | ARTICLE |
| Venue | Business Strategy and the Environment (JOURNAL) |
| Journal identifiers | ISSN: 0964-4733 • E-ISSN: 1099-0836 |
| Publisher | Wiley (PUBLISHER • GB) |
| DOI | 10.1002/bse.70733 |
| OpenAlex | W7135077202 |
| Language | EN |
| References cited | 102 |
This paper examines how the European Union Emissions Trading System allowance prices reshape the link between corporate environmental performance (CEP) and firms' growth expectations, measured by Tobin's Q. Using a panel of 1370 listed firms across 15 European countries from 2005 to 2024 and high‐dimensional fixed‐effects models, we first confirm a U‐shaped CEP–Q relationship: Initial emission cuts carry compliance costs, but beyond a threshold they deliver efficiency and reputational gains that boost valuation. We then show that allowance prices condition this pattern: Modest prices amplify CEP's upside, whereas very high prices erode—and, in extreme cases, reverse—its benefits through investment deferral, resource crowding out, and investor uncertainty. The erosion is economically substantial: Leakage‐exposed firms lose 65% of their CEP benefits as prices rise from low to very high levels, and high emitters lose 71%. Our findings highlight the nonlinear impact of carbon‐price stringency on investor expectations. For managers, we recommend hedging carbon‐price risk and prioritizing high‐impact abatement measures. For policymakers, establishing price corridors and providing targeted support to vulnerable firms can ensure carbon markets drive, rather than hinder, sustainable growth.
Carbon market · Carbon price · Emissions trading · European union · Panel data · Climate Change Policy and Economics · Corporate Social Responsibility Reporting · Sustainable Finance and Green Bonds
Panel Data Econometrics
Investment under Uncertainty
OLS and IV estimation of regression models including endogenous interaction terms
The Impacts of Environmental Regulations on Competitiveness
A Natural-Resource-Based View of the Firm
Estimating Standard Errors in Finance Panel Data Sets
Control Function Methods in Applied Econometrics
Thinking about U
Do investors care about carbon risk?
Biases in Dynamic Models with Fixed Effects
The role of capabilities in the adoption of green operations and competitiveness
Dynamics of Environmental and Financial Performance
Corporate Carbon and Financial Performance Revisited
The Valuation Relevance of Greenhouse Gas Emissions under the European Union Carbon Emissions Trading Scheme
Unraveling the effects of environmental outcomes and processes on financial performance
An Efficiency Perspective on Carbon Emissions and Financial Performance
On the empirical content of carbon leakage criteria in the EU Emissions Trading Scheme
Economic under-determination
The 'climatism' cartel
| Highly cited | No |
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