Possible Effects Of Government Action To Curb Global Warming On Stock Market Performance

Abstract

In recent years the stock market has experienced two steep declines. Between March 23, 2000 and October 9, 2002, the S & P 500 index fell from 1,527.35 to 776.76. After rising to an intraday high of 1,576.09 on October 11, 2007, the S & P 500 index fell to 676.53 on March 9, 2009 (GSPC Historical Prices S&P 500 Stock). Although the stock market has recovered in the years since, the double decline may make investors wonder if the stock market will decline again and what might cause any future decline. Finance theory (Block, 2010) suggests that corporate stock value is affected by investors’ expectations of economic growth. The theory of global warming (Brown, 2007) suggests that the production of carbon dioxide and other greenhouse gases causes global temperatures to rise and that the remedy would be the reduction of the production of greenhouse gases. If investors were to perceive that action to reduce greenhouse gases would also reduce economic growth, the result could be declines in stock market returns.

This paper presents a theoretical discussion of the possibility that stock market declines may arise if investors were to expect that politicians could take drastic action to curb global warming.