Katharina Schmidt, University of Mannheim

To address global warming, governments need to introduce climate policies such as emissions trading systems and carbon taxes, which impose high costs, particularly on carbon-intensive firms. Using an international panel of publicly listed companies, we examine how corporate carbon emissions influence firm value and investment decisions through different payout strategies. Our findings show that firms with higher carbon emissions consistently exhibit higher dividend yields than more sustainable firms. This is also associated with lower firm values for carbon-intensive firms, especially when dividend tax rates are high. Higher dividend tax rates create a lock-in effect, which incentivizes high-emission firms to reallocate retained earnings toward sustainability-related investments. These effects are stronger in the years following the Paris Agreement, reflecting heightened regulatory and societal pressure. Our findings demonstrate how instruments unrelated to specific climate policies can support the sustainable transformation of the economy.