The effects of carbon emissions trading on profitability and value: Evidence from Korean listed firms

We examine the effects of environmental regulations on the profitability and value of Korean listed firms, exploiting the first phase of the Korean Emissions Trading System (ETS) as an exogenous shock. While previous studies have mainly focused on environmental regulations in developed countries, often yielding inconclusive results, emerging markets like South Korea remain less explored. Using data on Korean listed firms from 2011 to 2017, we explore the effects of the 2015 Korean ETS on environmental and financial performance in treated firms. We find that treated firms did not reduce their carbon emissions, but their environmental ratings improved. Moreover, the ETS slightly increased profitability but significantly decreased firm value. Treated firms also exhibited a higher systematic risk, indicating that investors account for future carbon risks. In summary, the Korean ETS has not effectively incentivized firms to reduce emissions and has diminished their long-term value.