Profiting from Regulation: An Event Study of the EU Carbon Market
Tradable permit regulations have recently been implemented for climate change policy in many countries. One of the first mandatory markets was the EU Emission Trading System, whose first phase ran from 2005-07. Unlike taxes, permits expose firms to volatility in regulatory costs, but are typically accompanied by property rights in the form of grandfathered permits. In this paper, we examine the effect of this type of environmental regulation on profits. In particular, changes in permit prices affect: (1) the direct and indirect input costs, (2) output revenue, and (3) the carbon permit asset value. Depending on abatement costs, output price sensitivity, and permit allocation, these effects may vary considerably across industries and firms. We run an event study of the carbon price crash on April 25, 2006 by examining the daily stock returns for 90 stocks from carbon intensive industries and approximately 600 stocks in the broad EUROSTOXX index. In general, firms in industries that tended to be either carbon intensive, or electricity intensive, but not involved in international trade, were hurt by the decline in permit prices. In industries that were known to be net short of permits, the cleanest firms saw the largest declines in share value. In industries known to be long in permits, firms granted the largest allocations were most harmed.
|Date of creation:||01 Dec 2009|
|Date of revision:|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Daniel Millimet & John List & Warren McHone, 2004.
"The Unintended Disincentive in the Clean Air Act,"
Natural Field Experiments
00498, The Field Experiments Website.
- Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000.
"Markets for Clean Air,"
Cambridge University Press, number 9780521660839.
- A. Lans Bovenberg & Lawrence H. Goulder, 2001.
"Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does It Cost?,"
in: Behavioral and Distributional Effects of Environmental Policy, pages 45-90
National Bureau of Economic Research, Inc.
- A. Lans Bovenberg & Lawrence H. Goulder, 2000. "Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does it Cost?," NBER Working Papers 7654, National Bureau of Economic Research, Inc.
- Goulder, Lawrence & Bovenberg, A. Lans, 2000. "Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does It Cost?," Discussion Papers dp-00-27, Resources For the Future.
- Linn, Joshua, 2010. "The effect of cap-and-trade programs on firms' profits: Evidence from the Nitrogen Oxides Budget Trading Program," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 1-14, January.
- Michael Greenstone, 2002. "The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufactures," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1175-1219, December.
- A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
- Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
- Daniel Millimet & John List & Per Fredriksson & Warren McHone, 2003.
"Effects of Environmental Regulations on Manufacturing Plant Births: Evidence from a Propensity Score Matching Estimator,"
Natural Field Experiments
00501, The Field Experiments Website.
- John A. List & Daniel L. Millimet & Per G. Fredriksson & W. Warren McHone, 2003. "Effects of Environmental Regulations on Manufacturing Plant Births: Evidence from a Propensity Score Matching Estimator," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 944-952, November.
- Oberndorfer, Ulrich, 2009. "EU Emission Allowances and the stock market: Evidence from the electricity industry," Ecological Economics, Elsevier, vol. 68(4), pages 1116-1126, February.
- Lawrence H. Goulder & Marc A. C. Hafstead & Michael S. Dworsky, 2009. "Impacts of Alternative Emissions Allowance Allocation Methods under a Federal Cap-and-Trade Program," NBER Working Papers 15293, National Bureau of Economic Research, Inc.
- Gray, Wayne B, 1987. "The Cost of Regulation: OSHA, EPA and the Productivity Slowdown," American Economic Review, American Economic Association, vol. 77(5), pages 998-1006, December.
- Gray, Wayne B & Shadbegian, Ronald J, 1998.
"Environmental Regulation, Investment Timing, and Technology Choice,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 46(2), pages 235-56, June.
- Wayne B. Gray & Ronald J. Shadbegian, 1997. "Environmental Regulation, Investment Timing, and Technology Choice," NBER Working Papers 6036, National Bureau of Economic Research, Inc.
- Wayne B Gray & Ronald J Shadbegian, 1997. "Environmental Regulation, Investment Timing, and Technology Choice," Working Papers 97-9, Center for Economic Studies, U.S. Census Bureau.
- Goulder, Lawrence H. & Hafstead, Marc A.C. & Dworsky, Michael, 2010. "Impacts of alternative emissions allowance allocation methods under a federal cap-and-trade program," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 161-181, November.
- Puller, Steven L., 2006. "The strategic use of innovation to influence regulatory standards," Journal of Environmental Economics and Management, Elsevier, vol. 52(3), pages 690-706, November.
- Stefan P. Schleicher & Claudia Kettner & Angela Köppl & Gregor Thenius, 2007. "Stringency and Distribution in the EU Emissions Trading Scheme –The 2005 Evidence," Working Papers 2007.22, Fondazione Eni Enrico Mattei.
- Sijm, J. & Neuhoff, K. & Chen, Y., 2006.
"CO2 cost pass through and windfall profits in the power sector,"
Cambridge Working Papers in Economics
0639, Faculty of Economics, University of Cambridge.
- Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006. "CO 2 cost pass-through and windfall profits in the power sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 49-72, January.
- Randy Becker & Vernon Henderson, 2000. "Effects of Air Quality Regulations on Polluting Industries," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 379-421, April.
- Michael Dworsky & Lawrence Goulder & Marc Hafstead, 2009. "Impacts of Alternative Emissions Allowance Allocation Methods Under a Federal Cap-and-Trade Program," Discussion Papers 08-048, Stanford Institute for Economic Policy Research.
- Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.
When requesting a correction, please mention this item's handle: RePEc:isu:genres:13139. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Curtis Balmer)
If references are entirely missing, you can add them using this form.