Does the EU ETS Bite? The Impact of Allowance Over-Allocation on Share Prices

Thijs Jong, Oscar Couwenberg and Edwin Woerdman

No 2013/54, RSCAS Working Papers from European University Institute

Abstract: The aim of this paper is to examine whether shareholders consider the EU Emissions Trading Scheme (EU ETS) as value-relevant for the participating firms. An analysis is conducted of the share prices changes as caused by the first publication of compliance data in April, 2006, which disclosed an over-allocation of emission allowances. Through an event study, it is shown that share prices actually increased as a result of the allowance price drop when firms have a lower carbon-intensity of production and larger allowance holdings. There was no significant value impact from firms' allowance trade activity or from the pass-through of carbon-related production costs (carbon leakage). The conclusion is that the EU ETS does 'bite'. The main impact on the share prices of firms arises from their carbon-intensity of production. The EU ETS is thus valued as a restriction on pollution

Keywords: Climate change regulation; emissions trading; EU ETS; event study; share prices; over-allocation; allowance purchases and sales (search for similar items in EconPapers)
Date: 2013-07
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