James B. Bushnell, Howard Chong and Erin T. Mansur, "Profiting from Regulation: An Event Study of the European Carbon Market" (Revised October 2011) (Revised version published in American Economic Journal: Economic Policy. Volume 5, Issue 4. November, 2013.) Full Paper
We investigate the effect of cap-and-trade regulation on firm profits by performing an event study of the EU CO2 price crash. We examine returns for 124 carbon-intensive stocks and over 400 additional stocks, all from the broad EUROSTOXX index. Despite a reduction in environmental costs, we find that stocks fell for firms in carbon-intensive industries. We find similar effects for firms in electricity-intensive industries. The effects are most pronounced for firms that sell primarily within the EU. Our results imply that investors focus on product price impacts, rather than just compliance costs. We find evidence that firms' net allowance positions also strongly influenced the share price response to the decline in allowance prices.