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The Value Relevance of Greenhouse Gas Emissions Allowances: An Exploratory Study in the Related United States SO2 Market

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  • Derek Johnston
  • Stephan Sefcik
  • Naomi Soderstrom

Abstract

This paper examines the valuation implications of greenhouse gas (GHG) emissions allowances. We posit that the value of a firm's bank of emission allowances has two components that are likely to be positively valued by the capital market: (1) an asset value component; and (2) a real option value component. Since the necessary data to examine this research hypothesis in the setting of GHG emission allowances is not yet available, we test our conjecture by examining the value relevance of sulfur dioxide (SO2) emission allowances held by US electric utilities. Empirical results reveal that the capital market assigns a positive price to a firm's bank of SO2 emission allowances, consistent with the argument that emission allowances have, at least, an asset value component that is assigned a positive price by the market. We also find weak evidence consistent with the market assigning a real option value to the allowance banks.

Suggested Citation

  • Derek Johnston & Stephan Sefcik & Naomi Soderstrom, 2008. "The Value Relevance of Greenhouse Gas Emissions Allowances: An Exploratory Study in the Related United States SO2 Market," European Accounting Review, Taylor & Francis Journals, vol. 17(4), pages 747-764.
  • Handle: RePEc:taf:euract:v:17:y:2008:i:4:p:747-764
    DOI: 10.1080/09638180802481615
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    1. repec:kap:rqfnac:v:50:y:2018:i:4:d:10.1007_s11156-017-0653-x is not listed on IDEAS
    2. repec:eee:crpeac:v:23:y:2012:i:7:p:595-607 is not listed on IDEAS
    3. Brouwers, Roel & Schoubben, Frederiek & Van Hulle, Cynthia & Van Uytbergen, Steve, 2016. "The initial impact of EU ETS verification events on stock prices," Energy Policy, Elsevier, vol. 94(C), pages 138-149.
    4. Michelle Rodrigue & Michel Magnan & Charles Cho, 2013. "Is Environmental Governance Substantive or Symbolic? An Empirical Investigation," Journal of Business Ethics, Springer, vol. 114(1), pages 107-129, April.
    5. Frank Hartmann & Paolo Perego & Anna Young, 2013. "Carbon Accounting: Challenges for Research in Management Control and Performance Measurement," Abacus, Accounting Foundation, University of Sydney, vol. 49(4), pages 539-563, December.
    6. repec:eee:jocaae:v:10:y:2014:i:3:p:191-205 is not listed on IDEAS
    7. Isabel Lourenço & Manuel Branco & José Curto & Teresa Eugénio, 2012. "How Does the Market Value Corporate Sustainability Performance?," Journal of Business Ethics, Springer, vol. 108(4), pages 417-428, July.
    8. Thijs Jong & Oscar Couwenberg & Edwin Woerdman, 2013. "Does the EU ETS Bite? The Impact of Allowance Over-Allocation on Share Prices," RSCAS Working Papers 2013/54, European University Institute.
    9. Francisco Ascui & Heather Lovell, 2011. "As frames collide: making sense of carbon accounting," Accounting, Auditing & Accountability Journal, Emerald Group Publishing, vol. 24(8), pages 978-999, October.
    10. Isabel Lourenço & Jeffrey Callen & Manuel Branco & José Curto, 2014. "The Value Relevance of Reputation for Sustainability Leadership," Journal of Business Ethics, Springer, vol. 119(1), pages 17-28, January.

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