The impact of EU Emission Allowance price changes on stock performance of European electricity firms (2014)

Undergraduate: John Schmale

Faculty Advisor: Andrew Yates
Department: Economics

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This research investigates the relationship between EU Emission Allowance price changes and the stock performance of European electricity firms. The EU Emission Trading Scheme (ETS) began in 2005 as a cap and trade model to help meet the binding carbon emission reduction obligations set by the Kyoto Protocol. An existing study in the literature used a multifactor model which included the return of the market, the change in electricity prices, the change in oil prices, and the change in EU Emission Allowance prices as factors determining the return of individual European electricity firms from 2006-2009. My research uses this multifactor model for 2010-2012 data to see if the increased development and strictness of the ETS has caused a change in the relationship between the price developments of the carbon allowances and the stock return of European electricity firms. I also use a modified multifactor model which includes the country the electricity firms are headquartered as a significant variable¿this is included due to the decentralized structure of the ETS. If investors believe that the added cost imposed on electricity firms for having to purchase carbon allowances is able to be passed onto consumers then a positive correlation is expected between the variables studied.