Profiting from Regulation: An Event Study of the EU Carbon Market

We investigate the effect of cap-and-trade regulation of CO2 on firm profits by performing an event study of a CO2 price crash in the EU market. We examine returns for 90 stocks from carbon intensive industries and 600 stocks in the broad EUROSTOXX index. Firms in carbon intensive, or electricity intensive industries, but not involved in international trade were most hurt by the event.  This implies investors were focused on product price impacts, rather than compliance costs. We find evidence that firms’ net allowance positions also strongly influenced the share price response to the decline in allowance prices.