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Capital market response to emission rights returns: Evidence from the European power sector

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  • Veith, Stefan
  • Werner, Jörg R.
  • Zimmermann, Jochen
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    Abstract

    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 31 (2009)
    Issue (Month): 4 (July)
    Pages: 605-613

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    Handle: RePEc:eee:eneeco:v:31:y:2009:i:4:p:605-613

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: Emission trade Emission rights CAPM Electricity industry;

    References

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    Cited by:
    1. Ziegler, Andreas & Busch, Timo & Hoffmann, Volker H., 2011. "Disclosed corporate responses to climate change and stock performance: An international empirical analysis," Energy Economics, Elsevier, vol. 33(6), pages 1283-1294.
    2. Muñoz, M. Pilar & Dickey, David A., 2009. "Are electricity prices affected by the US dollar to Euro exchange rate? The Spanish case," Energy Economics, Elsevier, vol. 31(6), pages 857-866, November.
    3. Peter S. Schmidt & Therese Werner, 2012. "Channeling the final Say in Politics," CER-ETH Economics working paper series 12/165, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    4. Elliott, Robert J. & Lyle, Matthew R. & Miao, Hong, 2010. "A model for energy pricing with stochastic emission costs," Energy Economics, Elsevier, vol. 32(4), pages 838-847, July.

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