Voluntary corporate climate initiatives and regulatory threat

Does participation in voluntary environmental initiatives affect firm value? We take a closer look at the Chicago Climate Exchange (CCX) and the Climate Leaders (CL), two US initiatives to curb carbon emissions that were operating during a decisive regulatory event. In 2009 the Waxman-Markey Bill surprisingly passed the House of Representatives and brought the US economy a big step closer to a nationwide CO2 emission trading system. With an event study we assess how the stock market valued membership in the initiatives when the likelihood of CO2 regulation unexpectedly increased. Our findings suggest that only membership in the market-based CCX was considered beneficial for a mandated carbon market. This is consistent with research that equity-based regulation through financial markets can help economies favor clean industries over dirty ones. We interpret the empirical results in a simple model. Adding earlier market reactions to the firms' membership announcements, the model implies that the market had been betting on a mandatory emission trading system all along.