Finally, it seems to be working – the evolving valuation effect of the European Union’s emissions trading system

Figures & data

Figure 1. EU ETS allowance price evolution during Phase 3.

Figure 2. Allocated allowances and verified emissions of sample firms from Phase 1 to Phase 3 of the EU ETS.

Table 1. Sample firms by industry and country.

Panel A
Industry	Number of Firms	% Firms	Allocated EUA	% Allocated EUAs	Verified Emissions	% Verified Emissions	Allowance Surplus/ Deficit
Industrials	26	21.14%	926,281,103	31.71%	904,586,267	14.99%	2.40%
Utilities	20	16.26%	208,793,305	7.15%	2,962,407,991	49.08%	−92.95%
Energy	19	15.45%	668,186,625	22.88%	1,040,960,169	17.25%	−35.81%
Basic Materials	35	28.46%	1,076,284,962	36.85%	1,058,636,991	17.54%	1.67%
Consumer goods	17	13.82%	27,263,099	0.93%	53,472,233	0.89%	−49.01%
Health Care	5	4.07%	13,959,076	0.48%	15,679,828	0.26%	−10.97%
Telecommunications	1	0.81%	5,272	0.00%	7,008	0.00%	−24.77%
Total	123		2,920,773,442		6,035,750,487		−51.61%
Panel B
Country	Number of Firms	% Firms	Benchmark Equity Index
Austria	8	6.50%	AUSTRIAN ATX PRIME
Belgium	7	5.69%	BEL 20
Czech Republic	1	0.81%	PRAGUE PX
Denmark	2	1.63%	OMX COPENHAGEN
Finland	6	4.88%	OMX HELSINKI
France	17	13.82%	FRANCE CAC 40
Germany	19	15.45%	DAX
Hungary	2	1.63%	BUDAPEST
Ireland	1	0.81%	ISEQ
Italy	9	7.32%	FTSE MIB INDEX
Lituania	1	0.81%	OMX VILNIUS
Netherlands	4	3.25%	AEX INDEX
Norway	3	2.44%	OSLO SE OBX
Poland	3	2.44%	WARSAW SE WIG 30
Portugal	3	2.44%	PORTUGAL PSI-20
Romania	2	1.63%	ROMANIA BET
Slovakia	1	0.81%	SX SAX
Spain	12	9.76%	IBEX 35
Sweden	6	4.88%	OMX STOCKHOLM
Switzerland	2	1.63%	SWISS MARKET INDEX
UK	14	11.38%	FTSE 250

Notes: In this table we show a breakdown of our 123 firms by industry and by country. In Panel A, within each industry, we report the number of allocated allowances and verified emissions, each of which represent 1 t of Greenhouse Gasses, and the percentage allowance surplus or deficit, calculated as (Allocated EUA – Verified Emissions) /Verified Emissions. In Panel B, we list the number of firms in each country and the benchmark equity index for each country.

Table 2. Description of the Environmental Performance Measures.

Environmental Performance Measure	Environmental Performance Calculation	Environmental Performance Categorisation
Allowance surplus (Carbon Liability)	$\mathrm{Allowance}\mathrm{Surplus}(\mathrm{AS}{)}_{\mathrm{it}}={\displaystyle \frac{\mathrm{Allocated}\mathrm{Allowances}{\left(\mathrm{AA}\right)}_{\mathrm{it}}-\mathrm{Verified}\mathrm{Emissions}{\left(\mathrm{VE}\right)}_{\mathrm{it}}}{\mathrm{Verified}\mathrm{Emissions}{\left(\mathrm{VE}\right)}_{\mathrm{it}}}}$
(1) Absolute Performance	$\mathrm{\Delta A}{S}_{\mathrm{it}}=A{S}_{\mathrm{it}}-A{S}_{\mathrm{it}-1}$	Positive Absolute Performance: $\mathrm{\Delta A}{S}_{\mathrm{it}}>0$
		Negative Absolute Performance: $\mathrm{\Delta A}{S}_{\mathrm{it}}<0$
Industry Relative Surplus	$\mathrm{Industry}\mathrm{Relative}\mathrm{Surplus}(\mathrm{RS}{)}_{\mathrm{it}}=A{S}_{\mathrm{it}}-\mathrm{Average}\mathrm{Industry}\mathrm{surplu}{s}_{\mathrm{it}}$
	Where: $\mathrm{Average}\mathrm{Industry}\mathrm{surplu}{s}_{\mathrm{it}}=$
	${\displaystyle \frac{\mathrm{Allocated}\mathrm{Allowances}\mathrm{to}\mathrm{Activit}{y}_t-\mathrm{Verified}\mathrm{Emissions}\mathrm{of}\mathrm{Activit}{y}_t}{\mathrm{Verified}\mathrm{Emissions}\mathrm{of}\mathrm{Activit}{y}_t}}$
(2) Industry-Relative Performance	$\mathrm{\Delta R}{S}_{\mathrm{it}}=R{S}_{\mathrm{it}}-R{S}_{\mathrm{it}-1}$	Positive industry-relative performance: $\mathrm{\Delta R}{S}_{\mathrm{it}}>0$
		Negative industry-relative performance: $\mathrm{\Delta R}{S}_{\mathrm{it}}<0$
Change in Emissions relative to previous 5 years’ changes	$E(\mathrm{\Delta VE}{)}_{\mathrm{it}}={\displaystyle \frac{1}{5}}\left(\mathrm{\Delta V}{E}_{\mathrm{it}-1}+\mathrm{\Delta V}{E}_{\mathrm{it}-2}+\mathrm{\Delta V}{E}_{\mathrm{it}-3}+\mathrm{\Delta V}{E}_{\mathrm{it}-4}+\mathrm{\Delta V}{E}_{\mathrm{it}-5}\right)$
	${\sigma }_{\mathrm{it}}=\sqrt{\sum _{i=-1}^{-5}{\displaystyle \frac{{\left(V{E}_{\mathrm{it}}-\overline{V{E}_i}\right)}^2}{5}}}$
(3) Expectations-Relative Performance	$\mathrm{SD}1P_{\mathrm{it}}$ = $E(\mathrm{\Delta VE}{)}_{\mathrm{it}}-{\sigma }_{\mathrm{it}}$	Very Negative: $\mathrm{\Delta V}{E}_{\mathrm{it}}>\mathrm{SD}1N_{\mathrm{it}}$
	$\mathrm{SD}1N_{\mathrm{it}}=E(\mathrm{\Delta VE}{)}_{\mathrm{it}}+{\sigma }_{\mathrm{it}}$	Negative: $E(\mathrm{\Delta VE}{)}_{\mathrm{it}}<\mathrm{\Delta V}{E}_{\mathrm{it}}\le \mathrm{SD}1N_{\mathrm{it}}$
	where SD1P indicates a change of 1 standard deviation below the 5 year average change, and SD1N indicates a change of 1 standard deviation above the 5 year average change.	Positive: $E(\mathrm{\Delta VE}{)}_{\mathrm{it}}>\mathrm{\Delta V}{E}_{\mathrm{it}}\ge \mathrm{SD}1P_{\mathrm{it}}$
		Very Positive: $\mathrm{\Delta V}{E}_{\mathrm{it}}<\mathrm{SD}1P_{\mathrm{it}}$

Note: This table shows the calculation of our performance measures and how they are used to categorise firms. Firstly, we show how we calculate a firm’s allowance surplus relative to its verified emissions (which we also refer to as its Carbon Liability). Our first measure of environmental performance measures the annual change in a firm’s allowance surplus. We then show how we calculate the firm’s industry-relative allowance surplus. Our second measure of environmental performance measures the annual change in a firm’s industry-relative surplus. Our third measure of environmental performance measures the change in verified emissions relative to the previous 5 years’ changes. Finally, in the right hand column with present our categorisations for each measure.

Table 3. Performance Measures by Industry.

				(3) Expectations-Relative Performance
Industry	Obs.	(1) Positive Absolute Performance	(2) Positive Industry-Relative Performance	Very Negative	Negative	Positive	Very Positive
Industrials	208	75	113	36	61	76	35
Utilities	160	41	100	40	45	38	37
Energy	152	66	83	17	53	44	38
Basic Materials	280	119	148	33	91	109	47
Consumer goods	136	37	61	19	39	40	38
Health Care	40	14	24	5	10	14	11
Telecommunications	8	2	3	1	2	1	4
Total	984	354	532	151	301	322	210
%		36%	54%	15%	31%	33%	21%

Notes: In this table we present the average of each of our 3 environmental performance measures for the firm-year observations within each industry using the categorisations in Table 2.

Table 4. Event Study Results for EU ETS Emissions Verification Event Dates.

Event:	CAAR[−1, + 1]	CAAR[0,+1]	CAAR[0,+2]	CAAR[0,+3]	CAAR[0,+4]
2014 (2013 Emissions)	−0.0007	−0.0021	−0.0034	−0.0027	−0.0021
	−0.7932	−1.2768	−1.4867	−1.1969	−0.7464
2015 (2014 Emissions)	−0.0012	0.0000	0.0003	0.0009	0.0041
	−0.5033	0.2705	0.3885	0.4431	1.1089
2016 (2015 Emissions)	0.0071	0.0055	0.0051	0.0026	0.0035
	0.9091	1.0363	0.7533	0.3402	0.6923
2017 (2016 Emissions)	−0.019	−0.0024	−0.0017	−0.0075	−0.0052
	−0.3506	0.2672	0.8808	−0.0841	0.3368
2018 (2017 Emissions)	−0.0028	−0.0027	−0.0003	0.0027	0.0003
	−0.3768	−0.4585	0.2237	1.0631	0.8283
2019 (2018 Emissions)	0.0111	0.0081	0.0091	0.0099	0.0128
	1.921*	2.0917**	1.9496*	1.304	1.8367*
2020 (2019 Emissions)	0.0258	0.0141	0.0156	0.0184	0.0195
	2.9219***	2.3973**	2.4922**	2.0751**	1.6784*
2021 (2020 Emissions)	−0.0071	−0.003	−0.0034	−0.0022	−0.0015
	−0.8312	−0.2405	−0.0116	0.3979	0.6757

Note: This table shows the Cumulative Average Abnormal Returns (CAAR) for different event windows surrounding verification event dates in Phase 3 of the EU ETS. The second line reports a Corrado Rank test statistic (Corrado 1989). Significance measures are two-tailed and p values are indicated as follows: *p < 0.1; **p < 0.05; ***p < 0.01.

Table 5. Absolute and Industry-Relative Environmental Performance.

Absolute Performance	CAAR[0, 1]	CAAR[0, 2]	CAAR[0, 3]	Relative Performance	CAAR[0, 1]	CAAR[0, 2]	CAAR[0, 3]
Panel A: Full sample				Panel A: Full sample
Negative	0.0021	0.0022	0.0014	Negative	0.0029	0.0025	0.003
	0.9616	1.297	0.8752		1.3607	1.0179	1.3011
Positive	0.0023	0.0034	0.0052	Positive	0.0025	0.003	0.0015
	1.4654	1.8205*	1.8081*		1.6965*	1.5338	1.1325
Panel B: 3a				Panel B: 3a
Negative	0.0011	0.0006	−0.0007	Negative	0.0017	0.0009	0.0002
	0.0002	0.012	−0.5193		0.4657	0.2409	−0.2051
Positive	−0.0016	−0.0011	−0.0038	Positive	−0.0008	−0.0006	−0.0031
	0.4082	0.6873	0.3695		−0.0629	0.2853	−0.1806
Panel C: 3b				Panel C: 3b
Negative	0.0034	0.0042	0.0039	Negative	0.0041	0.0045	0.0045
	1.406	1.879*	1.8897*		1.2857	1.56	1.5079
Positive	0.0052	0.0068	0.0119	Positive	0.0042	0.006	0.0098
	1.6133	1.868*	2.0923**		1.7541*	2.2172**	2.4723**

Note: This tables shows the Cumulative Average Abnormal Returns (CAAR) for different event windows surrounding verification event dates for Phase 3 with firms grouped by their absolute and industry-relative carbon liability reduction performance (measures 1 and 2). Panel A reports the findings for the entire sample of verification events from 2014 to 2021. Panel B reports the results for the Phase 3a period which includes the events from 2014 to 2017. Panel C reports the findings for the Phase 3b period which includes the events from 2018 to 2021. The second line reports a Corrado Rank test statistic (Corrado 1989). Significance measures are two-tailed and p values are indicated as follows: *p < 0.1; **p < 0.05; ***p < 0.01.

Table 6. Emissions Reduction Performance Relative to Expectations.

Emissions change relative to expectations	CAAR[0, 1]	CAAR[0, 2]	CAAR[0, 3]
Panel A: Full sample
Very Negative	−0.0032	−0.0045	−0.005
	−1.6155	−1.6509*	−1.7861*
Negative	0.0025	0.0041	0.0032
	1.5314	2.2492**	1.9671**
Positive	0.004	0.0043	0.0032
	1.5459	1.7282*	1.0952
Very Positive	0.0023	0.0033	0.0073
	1.5778	1.8031*	2.3093**
Panel B: 3a
Very Negative	−0.0002	−0.0029	−0.0035
	−0.189	−0.8452	−1.0989
Negative	0.0005	0.0016	0.0007
	0.7197	1.501	1.3077
Positive	0.0014	0.0013	−0.0027
	0.2965	0.2576	−0.6164
Very Positive	−0.0026	−0.0021	−0.0009
	−0.7518	−0.4827	−0.1355
Panel C: 3b
Very Negative	−0.0082	−0.0073	−0.0076
	−2.5511**	−1.6631*	−1.5352
Negative	0.0048	0.0069	0.0061
	1.4593	1.6468*	1.4459
Positive	0.0067	0.0072	0.0092
	1.8983*	2.1977**	2.2213**
Very Positive	0.0052	0.0064	0.012
	2.188**	2.2835**	2.6515***

Note: This tables shows the Cumulative average abnormal returns for the different windows surrounding verification events for Phase 3 with firms grouped by their emissions reduction performance relative to expectations (measure 3). Expectations are calculated as the average emissions reduction over the previous five years and firms are grouped based on the whether their observed performance is within one standard deviation of expectations (positive or negative) or greater than one standard deviation away from expectations (very positive or very negative). Panel A reports the findings for the entire sample of verification events from 2014 to 2021. Panel B reports the results for the Phase 3a period which includes the events from 2014 to 2017. Panel C reports the findings for the Phase 3b period which included the events from 2018 to 2021. The second line reports a Corrado Rank test statistic (Corrado 1989). Significance measures are two-tailed and P values are indicated as follows: *p < 0.1; **p < 0.05; ***p < 0.01.

Corrado, C. J. 1989. “A Nonparametric Test for Abnormal Security-Price Performance in Event Studies.” Journal of Financial Economics 23 (2): 385–395. doi:10.1016/0304-405X(89)90064-0.

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