Prof. Erin Mansur, Yale University, will discuss his recent working paper in the Energy & Environmental Economics @ MIT Seminar Series.
Abstract: Emissions allowance trading systems have recently been implemented for climate change policy in many countries. One of the ?rst mandatory markets was the EU Emission Trading System, whose ?rst phase ran from 2005-07. Unlike taxes, allowance trading exposes ?rms to volatility in regulatory costs, but are typically accompanied by property rights in the form of grandfathered allowances. In this paper, we examine the e?ect of this type of environmental regulation on pro?ts. In particular, changes in allowance prices a?ect: (1) the direct and indirect input costs, (2) output revenue, and (3) the allowance asset value. Depending on abatement costs, output price sensitivity, and allowance allocation, these e?ects may vary considerably across industries and ?rms. 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, ?rms in industries that tended to be either carbon intensive, or electricity intensive, but not involved in international trade, were hurt by the decline in allowance prices. In industries that were known to be net short of allowances, the cleanest ?rms saw the largest declines in share value. In industries known to be long in allowances, ?rms granted the largest allocations were most harmed.