Do Domestic Climate Rulings Make Climate Commitments More Credible? Evidence from Stock Market Returns

The absence of legal enforcement mechanisms undermines the credibility of climate mitigation commitments. Some domestic courts have held governments accountable for their failures to reduce carbon emissions in accordance with their share of the global responsibility. Can such litigation make mitigation commitments more credible? This article offers evidence by examining stock market returns in Europe. Consistent with the hypothesis that following court rulings investors update their beliefs about mitigation policies, plaintiff victories have modest but economically significant positive effects on renewable energy stocks and similarly sized negative effects on coal stocks. These effects are stronger for home country firms and for the first ruling in a country. The climate judgments have no significant effect on “green” firms or major oil and gas producers. Plaintiff losses have no significant effect on asset prices. These findings highlight both the potential and limits of domestic climate litigation.