Abstract

http://ssrn.com/abstract=1516043
 
 

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Profiting from Regulation: An Event Study of the European Carbon Market


James B. Bushnell


University of California - Energy Institute

Howard Chong


University of California, Berkeley

Erin T. Mansur


Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

November 30, 2009


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 Scheme, 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.

Number of Pages in PDF File: 41

Keywords: Event Study, Carbon Markets, Tax Incidence

JEL Classification: G12, Q50

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Date posted: December 2, 2009  

Suggested Citation

Bushnell, James B. and Chong, Howard and Mansur, Erin T., Profiting from Regulation: An Event Study of the European Carbon Market (November 30, 2009). Available at SSRN: http://ssrn.com/abstract=1516043 or http://dx.doi.org/10.2139/ssrn.1516043

Contact Information

James B. Bushnell
University of California - Energy Institute ( email )
Berkeley, CA 94720
United States
Howard Chong
University of California, Berkeley ( email )
310 Barrows Hall
Berkeley, CA 94720
United States
Erin T. Mansur (Contact Author)
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
603 646 2398 (Phone)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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