واکنش بازار سرمایه به عودت دادن حقوق انتشار آلاینده: شواهد حاصل از بخش انرژی اروپا

Prior studies on the distributional effects of the European Union's Emission Trading Scheme (EU ETS) have so far only relied on supply and demand data. Empirical evidence from capital markets has been missing. We address this gap and measure the ETS's economic consequences, using the expectations of investors towards the regulatory impact on firm value. Employing a multifactor model, we show that returns on common stock of the largest affected industry, power generation, are positively correlated with rising prices for emission rights. This implies that the market predicts that firms are not only able to pass on their share of the regulatory burden to customers but even achieve windfall profits by overcompensating for the costs.

Even though the EU Emission Trading Scheme (ETS) is the world's largest market-based environmental regulation, only a few studies have so far tried to quantify its economic effects (e. g. Sijm et al., 2006, Smale et al., 2006 and Demailly, 2008). These papers have examined how the ETS possibly affects a firm's earnings by analyzing demand and supply functions. There is an additional way of assessing the ETS's likely impact on earnings: evaluating investor expectations. Using capital market data, we test whether investors believe that the regulation has an impact on the profitability of the firm. Our study thus complements the existing literature by adding a capital market perspective to the existing approach of procurement and sales markets. Economic theory suggests that a voiding of pollution certificates affects a firm's cost structure — as the usage for production of any other asset does: a rising price for carbon alters the outlay for additional certificates, the preferred input mix or the optimal output, and hence decreases the firm's income. Inherent to an emission trade is that the absolute effect on earnings is determined by the actual pollution caused by the production facilities and by the price quoted for emission allowances (Zimmermann and Veith, 2007). Firms may also be able to simultaneously adjust selling prices of goods and thus pass on a share or all the cost of certificates. Capital markets provide insight into how investors consider this possibility. If this regulatory burden is expected to be borne exclusively by the emitting firms, the relationship between share prices and the prices for emission rights should be negative: following capital market theory, a rising price for the input factor emission rights revises investors' expectations of future profits and in the end leads to lower share price quotations. Using a multifactor market model for the European power sector, we find that stock prices are positively correlated with prices of emission rights. This result indicates that the introduction of the ETS did not only alter the cost structure of firms, but also gave rise to an opportunity for price increases which even overcompensated for the imposed costs. Our results are robust towards a control group and to the inclusion of the firm-specific fuel mix and power market regulation.

This paper employed a multifactor market model to analyze the links between the market for pollution rights, other value-relevant factors and stock returns of electricity producers. It could be shown that the EU ETS has an economic effect at firm level: the certificates are regarded by investors as a relevant factor in valuation. However, this effect does not occur in the direction that regulators intended; generally shares in this industry are positively correlated with rising prices for emission allowances. Whereas spot quotations offer no significant contribution after the large drop in their prices, futures exhibit a stable explanatory power in the course of time. This behaviour pinpoints a temporary lack of economic significance of the trading scheme, with expected positive wealth effects again in the second trading period. The main findings remain unchanged when tested with several input factors. It is shown that the shares in this sector react positively towards a rising crude oil price and exchange rate, whereas natural gas prices and stock returns are not correlated. Additionally, for firms with a high share of fossil fuels employed in electricity generation, half of the positive effect of emission trading is wasted in the second trading period due to their production restrictions. Investors in this subsample anticipate an economically adverse component once the trading scheme is fully in force. Recent changes in market structure did not impact the market valuation, as opposed to end-user price controls. Despite the major liberalisation efforts in the energy sector, the latter regulatory measure is still an effective measure. However, the findings in this paper have to be interpreted with caution. Firstly, only the electricity generating industry has been examined, due to its importance for the whole EU ETS. Hence, the results may not necessarily apply to all other sectors involved. Once other sectors are included, the dominance of the energy sector in the trading system might decline. Secondly, the overall positive correlation between carbon and stock returns does not hold for utilities with a high proportion of fossil electricity generation. Their special position within the industry will play an important role during the political process of determining future allocation modes.