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Does the EU ETS bite? : the impact of allowance over-allocation on share prices
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1028-3625
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EUI RSCAS; 2013/54; Climate Policy Research Unit; [Florence School of Regulation]; [Climate]
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JONG, Thijs, COUWENBERG, Oscar, WOERDMAN, Edwin, Does the EU ETS bite? : the impact of allowance over-allocation on share prices, EUI RSCAS, 2013/54, Climate Policy Research Unit, [Florence School of Regulation], [Climate] - https://hdl.handle.net/1814/27605
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.