An empirical analysis of the effect of carbon credit quality on firm's value

The voluntary carbon market has been expanding in recent years. However, its credibility remains questioned due to limited transaction-level disclosure and concerns about environmental integrity of carbon credits. This thesis explores the VCM with a focus on two key challenges: transparency and quality of carbon credits. We examine whether voluntary disclosure of carbon credit retirements affects firm’s value, using a propensity score matching approach to a sample of North American and European firms purchasing carbon credits. For firms disclosing their retirements, we assess credit quality along three dimensions – relative risk, age, and price – and construct a Quality Index that aggregates three dimensions. Using Quality Index as a proxy for carbon credit quality, we then investigate whether firms with higher-quality carbon credits have higher firms’ value. Our findings show that 57% of retirements satisfy only one quality criterion, though recent years show a gradual shift toward credits of higher quality. Empirical analysis indicates that voluntary disclosure of carbon credit retirements does not significantly enhance firm value, indicating that investors do not consider public registries as the main information source. Moreover, credit quality does not have a statistically significant effect on Tobin’s Q, suggesting that proxies such as age and price may not align with investors’ understanding of quality criteria of carbon credits.