Can capital redistribution lead to reduced carbon emissions?

This project seeks to identify a link between capital redistribution and carbon emissions. This project identifies potential links between firms' eco-friendly announcements and changes in investor sentiment. It improves our understanding of how financial markets can impact carbon emissions as the movement of funds from less to more eco-friendly firms signals how market participants respond to environmentally friendly investments that creates incentives for firms to reduce carbon emissions and reduce polluting behaviour.

To provide insights, I will use orderflow as a proxy for market sentiment, where greater buying activity than selling activity will be assumed to signify positive sentiment and vice versa. This proxy will then be used to analyse a natural experiment by comparing the orderflow changes of 2 companies (Pepsi and Coca Cola) after one announces an eco-friendly initiative while the other does not. Focusing on a case study helps eliminate omitted variables that could confound the results. For example, Pepsi and Coca Cola operate in the same product market, target similar customers, and rely on similar production technologies. However, the results of the study generalize to other settings. Investor behaviour in this market reflects how investors act in others. These are also major firms in a sector that accounts for a large share of economic output and resembles others along several dimensions. Lessons from this case study are thus likely to inform the debate in the stock market more generally.

The analysis requires intraday trading information gathered form the ISSM and TAQ databases and will be made into useful information via the use of the Lee and Ready (1991) algorithm which identifies the direction of trade based on its price impact. The unique effect of the announcement will then be isolated using difference in difference analysis, other control variables will be applied where necessary as well as the inclusion of other variables that may augment the effect of the shock.

This proposed relationship could have significant implications for policy makers in that it would provide an incentive-based methodology for reducing carbon emissions rather than the more typical penal/legal code-based methodology. Both the penal/legal route have been shown to lead to carbon leakage and possibly overall increase carbon emissions rather than decrease them as emissions are merely shuffled around instead of actually being reduced (Branger and Quirion (2013), Long (2014)). As such a link that can be used to develop incentive-based policies can only aid in the search for a solution to the current climate problem.