The European Union Emissions Trading System Finance Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

The European Union (EU) created EU ETS known as the European Union Emissions Trading System, which is the largest multi-national emission trading scheme in the world. Launched in 2005 it served a pivotal role in climate policy of EU. Its purpose was to decrease the carbon footprint created by combustion installations with a rated thermal input capacity exceeding 20 megawatts. The scheme currently covers over 10,000 installations with a net heat excess of 20 MW in the energy and industrial sectors. These sectors are identified to be collectively responsible for 50% the EU's emissions of CO2 and 40% of its total greenhouse gas emissions. The EU ETS runs in phases.The first phase was for the duration between 2005 and 2007 which was the pilot phase. The Second phase which coincided with the commitment of the Kyoto Protocol requiring EU to meet 8% decrease in emissions from its 1990 levels.The phase 3 will reign from 2013 to 2020 as proposed by the commission.

Since its implementation the EU ETS in 2003, some studies have investigated its consequences and impacts on the refinery sector given their major presence in the list of installations with a capacity exceeding 20 megawatts.

Barbusiaux (2003) and Pierru (2007) develop methods to compute the marginal contribution of each finished product to the CO2 emissions of the refinery.

Reinaud (2005) suggests that the EU ETS could affect the competitiveness of refining companies, especially if indirect effects are realised when European carbon allowance (EUA) prices are passed-through to power prices.

Reinaud (2008)and Lacombe (2008) conclude that the EU ETS have a very modest effect on the competitiveness of the refinery sector. However, this literature does not assess the impacts of EU ETS on the equity of the oil companies. Given its importance to the investor community,The effects of this scheme could witness great shifts in the sector of oil industries and its future.Indeed, This has caused the rise of several literature modelling the determinants of oil market returns over the last two decades.

Here are few Examples

Al-Mudhaf and Goodwin (1993) find that oil price shocks affect positively the returns from 29 US oil companies during the 1973 oil shock period.

Rajgopal and Venkatachalam (1998) find a strong correlation between earnings-sensitivity to oil price risk and equity return-sensitivity to oil price risk for a sample of 25 petroleum refiner companies.

Sadorsky (2001) find that exchange rates, crude oil prices and interest rates each affect significantly stock returns of Canadian oil and gas companies.

Likewise, El-Sharif et al. (2005) show a significant impact of crude oil price in equity values in the oil and gas returns using data relating to the United Kingdom.

Lanza et al. (2005) argue that there is a significant relationship between the stock prices of six major oil companies and the spread between spot and future oil price, the relevant stock market index and the exchange rate.

Boyer and Filion (2007) discover that the Canadian oil and gas companies' stock returns are sensitive to the Canadian stock market return, crude oil and natural gas prices, growth in internal cash flows and proven reserves, interest rates, production volume and exchange rates.

Using a two-step regression analysis under two different arbitrage pricing models,

Scholtens and Wang (2008) find that NYSE listed oil and gas firms' returns is positively associated with the return of the market, the increase of the spot crude oil price, and negatively with the firm's book-to-market ratio.

A major limitation of this literature explaining the behaviour of oil stock markets is that it does not take into account the effects of environmental regulations. Further, the findings of

Oberdnorfer (2008) and Veith et al. (2009) indicate that EUA prices do affect significantly

Towards the end of the first phase of the EU ETS, a number of studies have assessed the ex-post economic impacts of the EU ETS. For example,

Hoffman (2007) investigates the impact of the EU ETS on the technology investment decisions that reduce CO2 emissions for the German electricity industry. He finds that the effect of the EU ETS is much stronger in low carbon investments with limited risks than in large-scale investments with long amortization times.

Using an error correction and autoregressive distributed lag model, Zachmann and Hirshhausen (2008) find that EUA prices are passed through asymmetrically to electricity futures prices in Germany.

Anger and Oberndorfer (2008) cannot detect any significant impact on firm performance and employment of regulated German firms. 3 returns of electricity companies. In this paper, we address this limitation by investigating whether and to what extent EUA price affects stock returns of European oil companies.

Few mor literatures have also concentrated on the cement, chemicals and steel industries. Namely chosen, given their dependence on oil prices. Mohamed Amine Boutaba (2009 ) revels a symmetric impact of EUA price on the chemical and cement stock returns.

Likewise,In this Research we empirically reveal the Impact of EUA prices on Equity values in the oil sector.

The remainder of the paper is organized as follows. Section 2 describes the empirical methodology.

Section 3 describes the data used in the study.

Section 4 contains the empirical results.

Section 5 concludes.