19-06-2013 1 Is the EU ETS Relevant? The Impact of Allowance Over- Allocaton on Share Prces Thjs Jong, M.Sc. Prof. dr. Oscar Couwenberg Dr. Edwn Woerdman Faculty of Law Department of Law and Economcs Energy Delta Gas Research (EDGaR) Paper avalable on SSRN, ttled: Does the EU ETS Bte? The Impact of Allowance Over-Allocaton on Share Prces 19-06-2013 2 EU ETS over-allocaton study Aprl 2006 event : frst EU Member State complance data was made publc The man EU ETS shock so far: Shocks provde nsghts nto regulatons effects Prce (n Euro) 35 30 25 20 15 10 5 0 Tme (days) EEX-EU CO2 Emssons E/EUA - Settlement prce (n ) 1
19-06-2013 3 Central queston & concluson Central queston: Dd EU ETS frms shareholders nterpret the carbon prce drop of Aprl 2006 as sgnfcant and, f so, how dd the event s mpact dffer among frms? Concluson: the mpact was sgnfcant. Share prces ncreased: - The less carbon-ntensve the producton - The more frms were long on allowances No mpact on share prces from allowance trade actvty, or pass-through of carbon costs Obtanng market values 19-06-2013 4 Wth market values we refer to the abnormal returns: the part of the share prce returns whch have been caused by the event The standard event-study approach: Determne Busness-As-Usual (BAU) returns Realzed returns - BAU returns = Abnormal returns 2
Hypothess (1) and (2) 19-06-2013 5 Market values of frms wth carbon leakage ncrease. Increases are larger for drter frms, than for cleaner frms. Market values of frms wthout carbon leakage decrease. Decreases are larger for drter frms than for cleaner frms. Carbon-ntensty of producton: emssons revenues Carbon leakage: 1 f frm s ndustral actvty n Commsson carbon leakage lsts; 0 otherwse Hypothess (3) and (4) 19-06-2013 6 Market values of frms ncrease (decrease) the more frms are short (long) on allowances Medum-term = allocaton + allocaton2006-2* emssons allocaton + allocaton Market values of frms ncrease the more frms decreased ther stock holdngs by (de facto) borrowng and sellng allowances Short-term = emssons + allocaton sales- 2006 + allocaton 2006 purchases 3
Hypothess (5) 19-06-2013 7 Market values of frms ncrease the larger the frms shares n the allowance trade Trade-ntensty = N ( = 1 No trade = 1 f Trade-ntensty equals zero 0 otherwse sales + sales + purchases purchases ) Overvew of the results 19-06-2013 8 EU ETS factor Hypotheszed Result carbon leakage (CL) (+) not sgnfcant carbon-ntensty wth CL (+) wthout CL (-) sgnfcant: (-) medum-term holdngs (-) sgnfcant: (+) short-term holdngs (-) not sgnfcant trade-ntensty (+) not sgnfcant no trade (-) not sgnfcant 4
Dscusson of the results 19-06-2013 9 Not sgnfcant: carbon leakage / pass-through of costs. Due to measurement problems? Not sgnfcant: allowance trade actvty Investors lack suffcent data on conducted trades? Valuatons of frms may mprove when t s known that such frms are borrowng allowances or havng surpluses The market wll beneft f the Commsson ncreases the frequency of publcatons of emssons and allowance transfers of frms 19-06-2013 10 Concluson The EU ETS does bte : Negatve mpact from carbon-ntensty - Prevous lterature: share prce valuatons are lower/hgher wth drter producton Postve mpact from medum term holdngs - Prevous lterature: wth the 2006 prce drop, lower returns wth more allowance holdngs Sgnals that frms wth better abatement capactes are consdered more compettve The EU ETS s valued as a restrcton on polluton 5
19-06-2013 11 Thank you for your attenton! Contact detals Thjs Jong, M.Sc. Unversty of Gronngen Faculty of Law Department of Law and Economcs T: +31 (0)50 363 2174 @: m.a.p.jong@rug.nl 6