Working Paper: NBER ID: w15572
Authors: James B. Bushnell; Howard Chong; Erin T. Mansur
Abstract: 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.
Keywords: EU Emissions Trading System; Carbon Market; Event Study; Environmental Regulation
JEL Codes: G14; H22; H23; Q50; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in permit prices (R48) | Stock market valuations of firms in carbon-intensive industries (L94) |
| CO2 prices (P22) | Output prices and revenues (D49) |
| Changes in permit prices (R48) | Direct compliance costs (J30) |
| Permit allocations and emissions (Q58) | Abnormal returns (G14) |
| Larger allocations of permits (D45) | Stock prices for firms with high emissions (Q52) |