The effects of sector free allowances & emissions on stock returns : A study on firms which partake in the EU emissions trading system

Sammanfattning: This study aims to investigate whether sectorial free allowances and sector emissions have any effect on a firm's stock return under the newly introduced EU ETS (Emission trading system). In doing so, the data have been structured as panel data and are gathered for a sample period of 10 years measuring from 2012-2021, looking at 6 sectors (Aviation, Combustion of fuels, refining of mineral oil, production of cardboard/ paper, production of pig iron and steel and production of bulk chemicals). The main empirical results indicate that free allowances have a positive effect on stock returns while sector emissions are insignificant. When categorizing the firms into low, medium and high emitters the results indicate that the medium category follows the main results, while low emitters are negatively affected by sector emissions with free allowances being non-significant. We observe no effect on either free allowance or sector emissions on firms’ stock returns within the high emitting category. To conclude, we find evidence indicating that free allowances have a positive effect on stock return while sector emissions do not.