We investigate how cap-and-trade regulation affects profits. In late
April 2006, the EU CO2 allowance price dropped 50 percent, equating
to a €28 billion reduction in the value of aggregate annual allowances.
We examine daily returns for 552 stocks from the EUROSTOXX
index. Despite reductions in environmental costs, we find that stock
prices fell for firms in both carbon- and electricity-intensive industries,
particularly for firms selling primarily within the EU. Our
results imply that investors focus on product price impacts, rather
than just compliance costs and the nominal value of pollution permits.
"Profiting from Regulation: Evidence from the European Carbon Market." American Economic Journal: Economic Policy,
Asset Pricing; Trading Volume; Bond Interest Rates
Information and Market Efficiency; Event Studies; Insider Trading
Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
Climate; Natural Disasters; Global Warming
Environmental Economics: Government Policy