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

42 Pages Posted: 8 Dec 2009 Last revised: 26 May 2014

See all articles by James Bushnell

James Bushnell

University of California - Energy Institute; University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

Howard Chong

University of California, Berkeley

Erin T. Mansur

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

Date Written: December 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 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.

Suggested Citation

Bushnell, James B. and Chong, Howard and Mansur, Erin T., Profiting from Regulation: An Event Study of the EU Carbon Market (December 2009). NBER Working Paper No. w15572. Available at SSRN: https://ssrn.com/abstract=1518765

James B. Bushnell (Contact Author)

University of California - Energy Institute ( email )

Berkeley, CA 94720
United States

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States

Howard Chong

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Erin T. Mansur

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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