The impact of carbon emissions on asset values and operating cash flows: evidence from Australian listed companies

In November 2011, the Australian government approved the legislation (Clean Energy Act 2011) to introduce a reduction plan of carbon emissions in Australia. This plan will be implemented from July 2012. This is one of the first accounting studies to investigate the potential impacts of this plan on long-lived asset values and operating cash flows for Australian listed companies. A sample of Australian Securities Exchange (ASX) 200 indexed companies from 2006 to 2010 is used. Hypotheses are tested based on Heckman’s (1979) two-stage approach. Three regression models are developed to examine the association between carbon emissions and asset values/operating cash flows. This study finds that asset values and operating cash flows will be adversely affected, if the reduction plan is implemented. Specifically, this study finds that the book value of long-lived assets will decrease, if listed companies are considered to be emissions-liable. The book value of long-lived assets is further found to be negatively associated with listed companies’ carbon emission levels. This study also demonstrates that operating cash flows of emissions-liable companies will be adversely affected. However, this study does not find a relationship between operating cash flows and companies’ emission levels. The empirical findings from Australian listed companies provide the evidence that the reduction plan of carbon emissions will adversely affect corporate entities’ asset values and operating cash flows. The results further indicate that the magnitude of the impact will be proportional to the companies’ emission levels. The implications of these empirical findings for listed companies, for the accounting profession, and for carbon emission regulators are also discussed.