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Summary
This study examines how carbon price uncertainty impacts firms' decisions to invest in decarbonization. Using options pricing data from the European Emissions Trading System, the authors construct the Carbon VIX, a high-frequency measure of carbon price uncertainty. Their analysis shows that uncertainty is high, fluctuates significantly over time, and responds to major climate policy events. To assess the impact of carbon price uncertainty on expected decarbonization investments, the study focuses on the stock performance of carbon solution providers—companies offering products and services that help businesses reduce emissions. The results show that while these firms’ stock returns rise with carbon prices, they decline when carbon price uncertainty increases. The study finds that uncertainty has a large and economically significant effect, comparable to that of falling carbon prices, suggesting that firms delay decarbonization investments when future emissions costs are uncertain—aligning with real options theory predictions.