Crossborder Carbon Taxes and Shareholder Wealth

This paper examines the effect of crossborder carbon taxes on shareholder wealth. Using stock price reactions to key announcements of the European Union (EU) carbon border adjustment mechanism (CBAM), we find that EU purchasers of CBAM-covered products experience significantly lower returns than non-European producers of such products. The effect is strongest for EU purchasers with non-EU supply chains. Further cross-sectional analyses show that these negative reactions are more pronounced when CBAM-related costs are higher and when firms have a lower ability to pass them on to their trading partners. Overall, the evidence suggests that equity markets expect crossborder carbon pricing on imports to be costly for EU firms. This paper was accepted by Caroline Flammer, sustainability. Funding: G. Ormazabal thanks the Cátedra de Dirección de Instituciones Financieras y Gobierno Corporativo del Grupo Santander, the R + D + I Project [Reference PID2022-143016NB-I00 funded by MCIN/AEI/10.13039/501100011033], and ERDF “A way of making Europe” [Grant TED2021-132531B-I00 funded by MCIN/AEI/10.13039/501100011033, the European Union NextGeneration EU/PRTR, IESE’s High Impact Projects Initiative–2023, and the Social Trends Institute]. R. Raney acknowledges financial support from the Spanish Ministry of Science and Innovation [Grant PID2019-111143GB-C31 funded by MICIU/AEI/10.13039/501100011033] and [Grant PID2023-150744NB-C41 funded by MICIU/AEI/ 10.13039/501100011033]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.07171 .