Profiting from Regulation: An Event Study of the EU Carbon Market

James Bushnell, Howard Chong () and Erin Mansur

No 15572, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Tradable permit regulations have recently been implemented for climate change policy in many countries. One of the first mandatory markets was the EU Emission Trading System, whose first phase ran from 2005-07. Unlike taxes, permits expose firms to volatility in regulatory costs, but are typically accompanied by property rights in the form of grandfathered permits. In this paper, we examine the effect of this type of environmental regulation on profits. In particular, changes in permit prices affect: (1) the direct and indirect input costs, (2) output revenue, and (3) the carbon permit asset value. Depending on abatement costs, output price sensitivity, and permit allocation, these effects may vary considerably across industries and firms. We run an event study of the carbon price crash on April 25, 2006 by examining the daily stock returns for 90 stocks from carbon intensive industries and approximately 600 stocks in the broad EUROSTOXX index. In general, firms in industries that tended to be either carbon intensive, or electricity intensive, but not involved in international trade, were hurt by the decline in permit prices. In industries that were known to be net short of permits, the cleanest firms saw the largest declines in share value. In industries known to be long in permits, firms granted the largest allocations were most harmed.

JEL-codes: G14 H22 H23 Q50 Q54 (search for similar items in EconPapers)
Date: 2009-12
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Note: EEE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as “Profiting from Regulation: An Event Study of the EU Carbon Market.” American Economic Journal: Economic Policy. (with Howard Chong and Erin Mansur) Vol 5, No. 4. November, 2013.

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Related works:
Working Paper: Profiting from regulation: an event study of the EU carbon market (2011)
Working Paper: Profiting from Regulation: An Event Study of the EU Carbon Market (2010)
Working Paper: Profiting from Regulation: An Event Study of the EU Carbon Market (2009)
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