Market Responses to India’s Carbon Credit Trading Scheme: Sectoral Evidence from Carbon Emission Intensive Industries

Abstract

This study analyses the stock-market reaction to the announcement of India’s Carbon Credit Trading Scheme (CCTS) on 28 June 2023. The study covers four carbon intensive sectors under the scheme namely, Aluminium, Chlor-alkali, Pulp and Paper and Textile. A sample of 18 listed companies was taken from these sectors using an event study methodology. The market benchmark used is the BSE 500 Index. The estimation period is 120 trading days and event window is of 21 trading days (from t-10 to t+10). To measure the market reaction around the announcement, we examine Average Abnormal Returns (AARs) and Cumulative Average Abnormal Returns (CAARs). Further evidence is provided by additional paired t-tests, Wilcoxon Signed-Rank tests, Corrado rank tests and modified Corrado tests. The results show that the CCTS announcement was associated with a negative cumulative market reaction. The AAR was negative but statistically insignificant on the announcement day while the CAAR was significantly negative and remained below zero during the post-announcement period. The first trading day after the announcement showed a large negative AAR and the cumulative effect was statistically significant even at the end of the event window. The sector-wise results show that the response was not uniform in the four sectors. Aluminium and Pulp and Paper exhibited significant negative CAARs in selected event windows whereas the results for Chlor-alkali and Textile were negative but weaker in statistical terms. The additional tests provide mixed evidence on the strength of the response. The results indicate that investors responded negatively to the announcement of the CCTS, but the magnitude and statistical significance of the reaction varied across sectors.