Stock Market Reactions to CO₂ Emissions Policies in Emerging Markets: Evidence from Carbon-Intensive Firms

Abstract

Climate change represents a substantial challenge for emerging markets, compelling them to balance rapid industrial growth with international climate obligations. Despite the urgency, the financial impact of national CO₂ emissions policies on carbon-intensive firms in these markets remains underexplored. This thesis investigates the stock market reactions to CO₂ policy announcements in emerging economies, emphasizing the role of policy credibility, institutional quality, and firm-specific emissions. Employing event-study analysis, fixed-effects panel regressions, and a novel natural language processing (NLP)-based Policy Credibility Score, the study finds significant negative abnormal returns for carbon-intensive firms following policy announcements. Short-term market reactions are intensified under policies perceived as highly credible and stringent, and firms with higher emissions face notably larger valuation declines. Institutional quality emerges as a key factor moderating long-term market volatility, reducing the adverse impact of regulatory uncertainty. These results highlight the importance of policy design and institutional strength in shaping investor expectations and transition risks. The findings offer actionable insights for policymakers, corporate managers, and investors, underscoring that transparent, enforceable, and institutionally robust climate policies can mitigate financial instability and guide sustainable growth in emerging markets.