The Value Relevance of Greenhouse Gas Emissions Allowances: An Exploratory Study in the Related United States SO2 Market

Posted: 3 Sep 2008

See all articles by Derek Johnston

Derek Johnston

Colorado State University, Fort Collins - Department of Accounting

Stephan Sefcik

University of Washington - Department of Accounting

Naomi S. Soderstrom

University of Melbourne

Date Written: September 2, 2008

Abstract

This paper examines the valuation implications of greenhouse gas (GHG) emissions allowances. We posit that the value of a firm's bank of emission allowances has two components that are likely to be positively valued by the capital market: 1) an asset value component; and 2) a real option value component. Since the necessary data to examine this research hypothesis in the setting of GHG emission allowances is not yet available, we test our conjecture by examining the value relevance of sulfur dioxide (SO2) emission allowances held by U.S. electric utilities. Empirical results reveal that the capital market assigns a positive price to a firm's bank of SO2 emission allowances, consistent with the argument that emission allowances have, at least, an asset value component that is assigned a positive price by the market. We also find weak evidence consistent with the market assigning a real option value to the allowance banks.

Keywords: Greenhouse Gas, emissions trading market

JEL Classification: G12, Q51, Q52, Q56, M41, M45

Suggested Citation

Johnston, Derek and Sefcik, Stephan E. and Soderstrom, Naomi S., The Value Relevance of Greenhouse Gas Emissions Allowances: An Exploratory Study in the Related United States SO2 Market (September 2, 2008). European Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1262508

Derek Johnston

Colorado State University, Fort Collins - Department of Accounting ( email )

256 Rockwell Hall
Fort Collins, CO 80523
United States
970-491-6443 (Phone)

Stephan E. Sefcik

University of Washington - Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Naomi S. Soderstrom (Contact Author)

University of Melbourne ( email )

Victoria
Melbourne, 3010
Australia

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