Carbon Credits: Holy Grail or Hot Air? Do Carbon Credits Enhance Firm Value? An Analysis of Financial and Legitimacy Moderators.

Abstract

This study examines from both financial and legitimacy perspectives the nuanced relationship between carbon credit use and firm value for North American firms. While carbon credits are increasingly embedded in corporate sustainability strategies, their impact on firm value remains contested. Resource-based theory views credits as sources of competitive and financial advantage, whereas legitimacy theory emphasizes stakeholder perceptions as critical to the acceptance and valuation of corporate climate actions. Using a panel dataset of more than 5,000 firm-year observations from publicly-listed North American companies, this research applies fixed effects and dynamic panel regression models to assess whether carbon credit use enhances firm value, as measured by Tobin’s Q. The results indicate no significant relationship between carbon credit use and firm value overall, challenging expectations that market-based emissions strategies consistently drive financial returns. However, in jurisdictions with stringent climate regulation, such as Canada, and for firms whose products enable customer emissions reductions, carbon credit use is positively linked to firm value. Conversely, high-emission firms using credits face negative impacts, particularly in Canada, reinforcing the importance of firm context. The study also found no financial advantage for originating or being allocated credits compared to purchasing them, implying that legitimacy signals and cost efficiency may outweigh innovation-related benefits. These findings underscore that stakeholder legitimacy, not only financial logic, plays a critical role in shaping investor’s views on firm value. Implications include the need for strengthened verification standards, transparent reporting, and strategic alignment of credit use with stakeholder expectations. The study provides guidance to firms and policymakers navigating the dual demands of environmental performance and legitimacy.