Last April, the California regulatory agency that oversees air quality announced its plan to encourage the sale of electric and zero-emission vehicles while phasing out the sale of gasoline-powered vehicles by 2035. If approved by the California Air Resources Board, 35% of new passenger vehicles would be required to be powered by electricity or hydrogen by no later than 2026, with 100% compliance to follow 10 years later.

Given California’s reputation as a bellwether of environmental action and that auto manufacturers do not typically build separate vehicles for California, the California standard has become a de facto nationwide standard. This initiative represents a regulatory risk event with respect to climate change—it has the potential to either augment or diminish the market value of companies likely to be affected by the shift away from the use of fossil fuels.

Financial regulators, investment strategists, and others frequently refer to climate change–related risks. Compared with other sources of uncertainty (such as interest rate risk or other known systematic risks), climate-change risk exposure may seem more abstract in nature, involving the risk of difficult-to-quantify losses far in the future. However, we think climate-change risk is very real and that we can measure it in company valuations today.

The stock market reaction to the initial announcement of the California ban on the sale of new gasoline-fueled vehicles can help demonstrate this. We estimate that companies likely to benefit from a shift away from fossil fuels have experienced average share price gains of 0.64%. This positive market reaction shows that the announcement by the regulatory agency was new information and that it had a statistically and economically significant effect on company valuations. In contrast, we find that firms likely to be harmed by this transition suffered an average loss of 2.98%.

Our findings add to an increasing body of evidence that the transition away from a fossil-fuel-powered economy presents a significant business risk for many companies. The event study we present below shows why—stock prices react to government action related to climate change. This is another reminder to “mind the carbon.”


On September 23, 2020, California Governor Newsom issued an executive order directing the California Air Resources Board to develop regulations that would eventually ban the sale of new gasoline-powered passenger vehicles. To the best of our knowledge, issuance of that order represents the first public announcement of the policy change. We therefore examine stock returns over a two-day window surrounding the announcement to capture any stock price impact of the policy change.

The initial population of our return study consists of all companies in the Russell 1000 Index as of August 31, 2020. To assess the valuation consequences of the announcement, we computed the return of each constituent from September 22 through September 23 (the day before the announcement and the day of the announcement) and subtracted the concurrent return on the Russell 1000 Index. We call the difference in returns the “announcement return,” which estimates the return on each company’s stock due to the announcement, controlling for the change in the entire stock market. In other words, the announcement return is the portion of the total stock price change most likely to reflect any valuation impact of the California ban.

At the same time, we collected the sub-industry classification of each company and sorted the Russell 1000 Index companies into three groups based on whether future sales (and earnings) are likely to be augmented, reduced, or unaffected by the California ban. The respective sub-industries comprising the “augmented” and “reduced” sub-samples are shown in the following table:

The first group (augmented future earnings) consists of 82 companies, and there are 72 companies in the second group (reduced future earnings). A total of 828 companies are classified as neutral.


The following table contains the average and median announcement returns (AR) for each group: augmented, reduced, and neutral.

*A p-value close to zero represents strong statistical evidence that announcement returns were meaningfully different from zero.

The firms which seem most likely to gain from implementation of the California ban saw an average stock price increase of 0.64% around the announcement, after controlling for the change in the entire stock market. The median stock price change in excess of the market was 0.81%, suggesting that the average excess return is not attributable to a few outliers. In contrast, net of stock market movements, the average stock price of companies facing the greatest prospect of reduced future earnings declined by 2.98%. The median value of the market-adjusted stock price decline was negative 2.62%.

It is challenging to determine the statistical significance of announcement returns when they are clustered on the same day. Nevertheless, after employing several methods to analyze the likelihood that these results are attributable to chance, we find little reason to dismiss the results as a statistical fluke. The announcement of increased regulatory action against gasoline-powered passenger cars does indeed appear to have created immediate winners and losers in the stock market.


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