Economic Consequences of Emission Trading Schemes : Evidence from the European Power Sector

The European emission trading scheme regulates the pollution of carbon dioxide for more than 11,000 facilities. Nevertheless quickly doubts arose about the efficiency of allocation methods and of the trade in emission allowances. Hence this paper tests for the hypothesis of economic insignificance with regard to the biggest of affected industries, the electricity generating sector. Employing a multifactor market model it is shown that returns on common stock in this industry are positively correlated with rising prices for emission allowances. Investors estimate that the firms are not only able to pass on a material share of the regulatory burden to customers but even achieve to generate windfall profits by overcompensating for the costs. As opposed to this prediction for the whole market, an adverse exposition could be found for utilities that mainly generate electricity from fossil fuels