Towards an auction system in the allocation of EU Emission Rights: its effect on firms’ stock market returns

Abstract

The impact of the European Union Emission Trading System (EU ETS) on firms’ stock market returns relies on the system employed to allocate emission allowances. This impact has been analysed in the literature for the EU ETS Phase I and II periods under which allowances were given for free. However, the effect during the current phase, Phase III, where the allocation of emission permits is based on an auction system has not yet been analysed and discussed. In this framework, this paper discloses the results of a research aimed at investigating the interactions between the stock market returns of Spanish industry sectors under EU ETS and emission rights prices during the first year and half of Phase III. A cointegrated Vector Error Correction analysis is employed for the period covering January 1st 2013 until July 31st 2014. The analysis presents statistically significant positive long-run impact of EU ETS on power sector, cement and petroleum and negative impact on iron and steel sectors. No short-run interactions were found for the sectors analysed.