This paper analyses the reaction of the US stock market to the initial publication and subsequent media coverage of two climate change studies published in the journal Nature in 2009.

Understanding the reaction of stock markets is important since a delay in reaction may provide arbitrage opportunities. The two studies in question, Warming Caused by Cumulative Carbon Emissions Towards the Trillionth Tonne (Allen et al, 2009) and Greenhouse- Gas Emission Targets for Limiting Global Warming to 2 Degrees C (Meinshausen et al, 2009) concluded that less than half of the world’s existing oil, gas and coal reserves can be used if global warming is to be limited to 2 degrees above pre-industrial levels by 2050.

Dominguez-Faus, Rosa and Griffin, Paul A. and Jaffe, Amy Myers and Lont, David H., Science and the Stock Market: Investors’ Recognition of Unburnable Carbon (May 19, 2014). Accepted presentation at the 37th International Association for Energy Economics Conference on Energy and the Economy, New York, June 2014. Available at:

Since the stock price of fossil fuel companies is largely based on their fuel reserves, it was expected that their share price would decline following news that these reserves may be “unburnable”, yet Dominguez- Faus et al find that the stock market reaction to the research, both at the time of publishing and from subsequent media coverage as the story gained momentum, was much lower than some market commentators expected. In addition they speculate that the extent and nature of media coverage may influence the stock market reaction.


The sample of companies included in the statistical analysis included the 63 largest oil and gas firms in the US. The financial data was drawn from Datastream and the news information from Factiva, with 88 relevant news stories identified between March 2012 and March 2013, the peak period for media coverage of the unburnable carbon story.

The first hypothesis proposes that a “rational response” by the stock market would result in a limited negative reaction to initial reports of unburnable carbon. A second hypothesis is a “delayed response”, in which there is a stronger market reaction to later stories driven by media interest and interpretation. A third hypothesis is no response, which might occur if investors expect future policy changes or corporate activities to fully mitigate the potential risk.

In analysing the relationship between stock price movements and media stories about unburnable carbon, the study accounted for the effect of movements in the oil price and general news about the energy industry. The authors acknowledge the methodology problem that all the issues may be interlinked making causality difficult to determine, as well as the limitations of focusing on US companies.


In the three days around the initial publication of the research in Nature, there is evidence for a significant negative stock price reaction. At that time there were no other prominent news stories relating to the energy industry which supports the first hypothesis that price movements were in response to the new research. However the reaction was not sustained, and following later news stories in the period 2012-2013, the reaction followed the opposite pattern, with no immediate effect but a delayed response over the following two weeks, i.e. supporting the second hypothesis. The aggregate impact on stock prices of all stories relating to unburnable carbon between 2009 and mid-2013 amounts to 2.5% of market capitalisationo of the companies in question, primarily occurring after the initial Nature articles.


The results support the hypothesis of a rational investor response around the time of the initial article, and a smaller delayed reaction to future news stories driven by media coverage. Several possible explanations are proposed for the relatively muted reaction:

  • Many investors may expect that new technologies will mitigate negative consequences, such as carbon capture and sequestration allowing more fossil fuels to be burned without increasing global warming, or energy firms developing less intensive methods of energy production.
  • The time frame to 2050 is too long and the likely responses too varied for it to have a large impact on many investors’ estimation of present value.
  • Many investors believe that the predicted increase in demand for fuel will override attempts to restrict fossil fuel usage.
  • A lack of sufficient information at a company level to accurately evaluate the potential impact of unburnable carbon.
  • Media bias, focusing on the negative impact from a single issue while institutional investors consider a range of factors when making portfolio management decisions. Subsequent media reports also tended not to draw on factual data to back up their predictions of catastrophic impact on stock prices.

Possible reasons for some research having limited or no impact on stock prices include poor communication on the part of scientists and the reluctance of investors to consider information that may be too long term or uncertain in nature. Other studies have found that a more significant reaction occurs when the initial research is more widely publicised, particularly if it is picked up in a media “frenzy”. However, rational investors should consider all possible future scenarios including the likelihood of changes to corporate strategy to mitigate risk, or potential future technologies and government policies, i.e. taking a more pragmatic approach than the media tends to do.

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    RI Quarterly Vol. 4: Focus on climate

    September 2014