The Economic Geography of European Carbon Market Trading

Abstract:     
The European Union Emissions Trading Scheme (EU ETS) is the world’s first regional carbon trading market. Its objective is to link European countries around a common price for carbon as a step towards helping the global economy transition to a low-carbon production base. This article is one of the first quantitative econometric attempts to examine the temporal and spatial geography of European carbon trading. It shows that financial investors are responsive to the impact of carbon pricing on the quoted stock valuation of energy companies. More specifically, the market is efficient around the staging of carbon markets, suggesting that each phase of a carbon market’s introduction is treated differently by investors rather than perceiving carbon as a long-term price signal. Furthermore it is argued that the energy market structure within which energy companies operate significantly influences how electricity is priced in the context of growing carbon costs. This in turn impacts the financial implication of carbon trading differently for companies located across various geographies. It is argued that geographical complexity in the operation of carbon markets must be further understood in order for policy makers to effectively influence corporate investment decisions both within Europe and as carbon markets expand inter-regionally.

Keywords: carbon trading, climate change, economic geography, market structure, policy staging, corporate environmental performance

JEL Classifications: G12, G15, G18, K00

Working Paper Series