Does the EU ETS Bite? The Impact of Allowance Over-Allocation on Share Prices

42 Pages Posted: 7 May 2013 Last revised: 30 Jul 2013

See all articles by Thijs Jong

Thijs Jong

affiliation not provided to SSRN

Oscar Couwenberg

NHL Stenden University of Applied Sciences; University of Groningen - Campus Fryslan

Edwin Woerdman

University of Groningen - Faculty of Law

Date Written: April 23, 2013

Abstract

The aim of this paper is to find out whether shareholders consider the EU Emission Trading Scheme (EU ETS) as value relevant for polluting firms. An analysis is conducted of changes in share prices, caused by the first publication of annual compliance data. In April 2006, it turned out that there was an over-allocation of emission allowances, causing a large drop in allowance prices. Through an event study, the impact of this drop on share prices of firms under the EU ETS is analyzed. It is considered to what extent these share price impacts have been determined by (1) their carbon-intensity of production, (2) the pass-through of carbon-related production costs (carbon leakage), (3) their allowance holdings, and (4) their involvement in allowance trade. The results are, respectively, that the carbon-intensity of production has a negative value impact on firms, that larger allowances holdings are positively valued, and that the trade activity of firms has no significant impact. Due to measurement problems, carbon leakage cannot be reliably specified in the regressions. The conclusion is that the EU ETS does ‘bite’. The main impact on the share prices of firms arises from their carbon-intensity of production. The EU ETS is thus valued as a restriction on pollution.

Keywords: climate policy, EU ETS, event study, over-allocation, allowance transactions

JEL Classification: G14, H22, H23, Q54

Suggested Citation

Jong, Thijs and Couwenberg, Oscar and Woerdman, Edwin, Does the EU ETS Bite? The Impact of Allowance Over-Allocation on Share Prices (April 23, 2013). University of Groningen Faculty of Law Research Paper No. 05/2013, Available at SSRN: https://ssrn.com/abstract=2255328 or http://dx.doi.org/10.2139/ssrn.2255328

Thijs Jong (Contact Author)

affiliation not provided to SSRN

Oscar Couwenberg

NHL Stenden University of Applied Sciences ( email )

Rengerslaan 8-10
Leeuwarden, Friesland 8917 DD
Netherlands
31 582441479 (Phone)

University of Groningen - Campus Fryslan ( email )

Wirdumerdijk 34
Leeuwarden, 8911 CE
Netherlands
31 582055000 (Phone)

HOME PAGE: http://www.rug.nl/staff/o.couwenberg/?lang=en

Edwin Woerdman

University of Groningen - Faculty of Law ( email )

9700 AS Groningen
Netherlands
+31 50 363 5736 (Phone)
+31 50 363 7101 (Fax)

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