Profiting from Regulation: Evidence from the European Carbon Market


Jim B. Bushnell, Howard Chong, and Erin T. Mansur

American Economic Journal: Economic Policy, Volume 5, Issue 4, November 2013, Pages 78-106.
Working Paper, June 2012.
NBER Working Paper 15572, December 2009.
SSRN abstract number 1516043, December 2009.
Energy Institute at Haas Working Paper-200, December 2009.



We investigate how cap-and-trade regulation affects profits. In late April 2006, the EU CO2 allowance price dropped 50%, equating to a €28 billion reduction in the value of aggregate annual allowances. We examine daily returns for 548 stocks from the EUROSTOXX index. Despite reductions in environmental costs, we find that stocks fell for firms in both carbon- and electricity-intensive industries, particularly for firms selling primarily within the EU. Our results imply that investors focus on product price impacts, rather than just compliance costs. We find evidence that firms’ net allowance positions also influence how share prices respond to allowance prices.