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The relationship between carbon-intensive fuel and renewable energy stock prices under the emissions trading system

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  • Chun, Dohyun
  • Cho, Hoon
  • Kim, Jihun

Abstract

In this study, we analyze the relationship between the price of carbon-intensive fuel and the stock prices of renewable energy companies, incorporating the price of carbon in the European Union emissions trading system (EU ETS). Specifically, we employ wavelet methods to reconstruct time series with specific levels of persistence, reducing noise, trend, and seasonal components. Using these wavelet-adjusted series, we conduct a regression analysis that considers exogenous factors that may influence the demand for electricity and emissions allowances. Subsequently, we estimate vector autoregressive models and obtain a connectedness measure and impulse response functions. The results consistently imply that increases in coal prices have (counterintuitively) a negative effect on renewable energy stock prices. Moreover, we show that this can be explained by a negative relationship between coal and carbon prices and a positive relationship between carbon prices and renewable energy stock prices. Our study contributes to the literature by uncovering the negative relationship between the price of carbon-intensive fuel and renewable energy stock prices by applying a suitable filtering procedure.

Suggested Citation

  • Chun, Dohyun & Cho, Hoon & Kim, Jihun, 2022. "The relationship between carbon-intensive fuel and renewable energy stock prices under the emissions trading system," Energy Economics, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:eneeco:v:114:y:2022:i:c:s0140988322003978
    DOI: 10.1016/j.eneco.2022.106257
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    Keywords

    EU ETS; Carbon prices; Fuel prices; Renewable energy; Wavelets;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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