EU Emission Allowances and the Stock Market: Evidence from the Electricity Industry

This paper constitutes – to our best knowledge – the first econometric analysis on stock market effects of the EU Emission Trading Scheme (EU ETS). Our results suggest that EU Emission Allowance (EUA) price developments matter to the stock performance of electricity firms: EUA price changes and stock returns of the most important European electricity corporations are shown to be positively related. This effect does not work asymmetrically, so that stock markets do not seem to react differently to EUA appreciations in comparison to depreciations. The carbon market effect is shown to be both time- and countryspecific: It is particularly strong for the period of EUA market shock in early 2006, and differs with respect to the countries where the electricity corporations analysed are headquartered. Stock market reactions to EUA volatility could not be shown. -- Dieses Papier untersucht die Aktienmarkteffekte von Preisentwicklungen auf dem Markt für Emissionszertifikate im Rahmen des Europäischen Emissionshandelssystems (EU ETS). Die Analyse fokussiert dabei auf die Aktienmarktperformance des europäischen Elektrizitätssektors, der gemessen an CO2-Emissionen größten Branche im EU ETS. Nach unseren Ergebnissen spielt der Zertifikatmarkt eine wichtige Rolle für die Aktienentwicklungen der analysierten Elektrizitätsfirmen. Ein Anstieg des Zertifikatpreises sorgt für Kursgewinne bei den Aktien der Elektrizitätsfirmen aus fast allen europäischen Ländern. Hingegen scheint die Volatilität der Emissionsrechte entgegen anderslautender Erwartungen nicht auf die Aktienkursentwicklung der untersuchten Unternehmen zu wirken.EU ETS,electricity stocks,asset pricing

Returns and Volatility of Eurozone Energy Stocks

This paper constitutes a first analysis on stock returns and stock return volatility of energy corporations from the Eurozone. According to our results, the gas market does not play a role for the pricing of Eurozone energy stocks. However, changes in the Euro to U.S. Dollar exchange rate as well as developments at the money and especially at the oil market strongly affect returns of the energy stock portfolios analyzed. While oil price hikes negatively impact on stock returns of European utilities, they lead to an appreciation of oil and gas stocks. Most importantly, we show that oil market volatility negatively affects European oil and gas stocks. In contrast, energy stock volatility is not driven by volatility of the resource market, but only by its own dynamics. --Energy stocks,resource prices,volatility,asset pricing

Lost in Transmission? Stock Market Impacts of the 2006 European Gas Crisis

Around the turn of the year 2005/2006, the Russian freezing of natural gas exports to the Ukraine led to a European gas crisis. Using event study technique, we first investigate whether the Russian announcement of suspension of gas deliveries, this suspension itself as well as its withdrawal, had an effect on unsystematic volatility of European energy stocks. Secondly, we measure event effects on stock returns, taking volatility into account. Our results suggest that the announcement of the crisis and therefore a rise of Western Europe?s energy cost and risk tended to increase market expectations with respect to energy-related firms. In contrast, market uncertainty increased when Russia reopened its valves. One reason for these findings could be windfall profits of energy-related companies due to increasing resource and electricity prices. The existence of event-induced volatility confirms our methodological approach in order to test for abnormal returns. --energy security,event study,gas crisis

Environmentally oriented energy policy and stock returns: an empirical analysis

This paper analyzes the effect of environmental regulation on stock returns (as a measure of economic performance) for German energy corporations. By using event study methodology, we consider the last minute victory of the acting government in the 2002 German federal elections to the Lower House of Parliament (Bundestag). The government coalition consisted of Social Democrats and the Green party and was generally associated with a paradigm shift in environmental and particularly energy policy towards the promotion of renewable energies and a phasing out of nuclear energy. In contrast, the opposing Christian Democrats and Liberal party signaled different priorities in line with traditional energy policy. Compared with other environmental event studies, we include insights from modern empirical finance and therefore also apply the Fama-French three-factor model to estimate the abnormal daily and monthly stock returns. The main estimation results of the empirical analysis imply (1) no evidence of a general negative impact of the 2002 Bundestag elections on stock returns for traditional utilities and (2) a positive albeit transitory short-run effect for the entire group of renewable energy corporations. We conclude that the 2002 Bundestag elections and therefore stringent environmental regulation had at least no general negative effect on the economic performance of energy corporations. One reason for this could be that the compliance costs of the government?s environmentally oriented energy policy were lower for traditional utilities than expected. --Environmental regulation,Energy policy,Nuclear energy,Renewable energies,Event study,CAPM,Market model,Three-factor model

The Impact of the European Union Emissions Trading Scheme on Competitiveness in Europe

This literature review analyses the impacts of the EU ETS on competitiveness focussing on existing simulation studies. We have identified the choice of the reference scenario as the most critical issue for an appropriate analysis of the relevant literature. We find, however, that effects of the scheme on competitiveness are modest, even given the business as usual case that does not take the legally binding framework of the Kyoto Protocol into account. Furthermore, the impacts of the EU ETS are smaller than the impacts of alternative Kyoto-based regulation scenarios. Compared to these other regulation methods ETSs can have positive competitiveness effects. However, the EU ETS is not designed to boost Europe?s economy. Its prime purpose and justification is to ensure that Europe?s CO2 emissions are brought down and Kyoto targets are reached at minimal costs. To our opinion, it is therefore important that the system as well as modifications to it do not undermine the environmental goals associated with this policy instrument. --emissions trading,competitiveness,environmental regulation

Public Interest vs. Interest Groups: Allowance Allocation in the EU Emissions Trading Scheme

This paper presents a political-economy analysis of allowance allocation in the EU Emissions Trading Scheme (EU ETS). A common-agency model suggests that a politicalsupport maximizing government considers the preferences of sectoral interest groups besides public interest when allocating emissions permits. In the stylized model, industries represented by more powerful lobby groups face a lower regulatory burden, which for sufficiently high lobbying power leads to an inefficient emissions regulation. An empirical analysis of the first trading phase of the EU ETS corroborates our theoretical prediction for a cross-section of German firms, but also shows that the political-economy determinants of permit allocation depend on firm characteristics. We find that large carbon emitters that were heavily exposed to emissions regulation and simultaneously represented by powerful interest groups received higher levels of emissions allowances. In contrast, industrial lobbying power stand-alone or threats of potential worker layoffs did not exert a significant influence on the EU ETS allocation process. --Emissions trading,interest groups,regression analysis

EU Emission Allowances and the Stock Market : Evidence from the Electricity Industry

This paper constitutes – to our best knowledge – the first econometric analysis on stock market effects of the EU Emission Trading Scheme (EU ETS). Our results suggest that EU Emission Allowance (EUA) price developments matter to the stock performance of electricity firms: EUA price changes and stock returns of the most important European electricity corporations are shown to be positively related. This effect does not work asymmetrically, so that stock markets do not seem to react differently to EUA appreciations in comparison to depreciations. The carbon market effect is shown to be both time- and countryspecific: It is particularly strong for the period of EUA market shock in early 2006, and differs with respect to the countries where the electricity corporations analysed are headquartered. Stock market reactions to EUA volatility could not be shown

Lost in Transmission? Stock Market Impacts of the 2006 European Gas Crisis

Around the turn of the year 2005/2006, the Russian freezing of natural gas exports to the Ukraine led to a European gas crisis. Using event study techniques, we first investigate whether the Russian suspension of gas deliveries, the announcement of this suspension as well as its withdrawal had an effect on unsystematic volatility of European energy stocks. Second, we measure event effects on stock returns, taking volatility (GARCH effects) and especially possible firm-specific, event-induced volatility into account. We get – at a first glance – counterintuitive results suggesting that the definite announcement of the crisis and therefore a rise of Western Europe’s energy risk tended to increase market expectations with respect to energy-related firms. In contrast, market uncertainty increased the day when Russia reopened its valves. One reason for these findings could be windfall profits of energy-related companies due to increasing resource and electricity prices. The existence of event-induced volatility at a between-firm level confirms the choice of our flexible abnormal returns methodology.Energy security, event study, gas crisis

Does the Stock Market Value the Inclusion in a Sustainability Stock Index? An Event Study Analysis for German Firms

This paper empirically analyzes the effect of the inclusion of German corporations in the Dow Jones STOXX Sustainability Index (DJSI STOXX) and the Dow Jones Sustainability World Index (DJSI World) on stock performance. In order to receive robust estimation results, we apply an event study approach that is based on both a modern asset pricing model, namely the three-factor model according to Fama and French (1993), and additionally on a GARCH model. Our empirical analysis implies that stock markets may penalize the inclusion of a firm in sustainability stock indexes. This result is mainly driven by the negative effect of the inclu-sion in the DJSI World. While we do not find significant average cumulative abnormal returns for the inclusion in the DJSI STOXX, the inclusion in the DJSI World leads to strong nega-tive impacts. This suggests that the inclusion in a more visible sustainability stock index has larger negative impacts

Understanding the competitiveness implications of future phases of EU ETS on the industrial sectors

In making key decisions for the future phases of the European Union Emissions Trading Scheme (EU ETS), policy makers need to fully understand the competitiveness implications of these decisions on industrial sectors. In this paper, we conduct an empirical analysis of cost pass-through ability of producers of selected products within the sectors refineries, glass, chemicals and ceramics of the UK economy. Our results provide new insights into the debate on the ability of pass-through of costs generated by the EU ETS. They suggest that some of the sectors analysed have the ability to pass-through a portion of their carbon costs to the consumers: The UK sectors are not capable to completely pass-through their costs into output prices, with the exception of UK ceramic goods. --Emissions Trading,Competitiveness,Cost Pass-Through