Investability of the European Union emissions trading scheme: an empirical investigation under economic uncertainty

This paper explores investment characteristics of the European Union Emissions Trading Scheme (EU ETS) during the Global Financial Crisis (GFC). We show that the EU ETS demonstrates significant price volatility, risk-adjusted return under-performance and positive correlations with international equity markets during the GFC, while an OLS regression reveals that carbon market returns are only statistically linked to European equity market returns (both lagged and unlagged). The poor investment performance of carbon assets, interpreted alongside our additional findings and the context of the EU ETS, indicates that during financial crises impacting on developed economies, investors in such economies may need to avoid buy-and-hold strategies and reduce portfolio weightings. Moreover, these investors may need to consider diversifying their portfolio holdings until there is an improvement in economic conditions and/or greater certainty with global climate change policy.