Effects of Carbon Pricing on EU Equity Markets

Sammanfattning: The current work examines whether the price changes of European Union Allowance (EUA) contracts for emitting carbon dioxide affect the price dynamics of the European equity markets. The author uses the Vector Autoregressive (VAR) and Vector Error Correction (VECM) models in four specifications to investigate the linkages between the EUA market and major stock indexes of 27 EU countries which are participating in the second phase of the European Emissions Trading System. The regression models, together with Granger causality testing, suggest that stock markets of several developed European countries exhibit significant negative responses to EUA price shocks. In particular, CAC 40 (France), DAX 30 (Germany), AEX (the Netherlands), and FTSE MIB (Italy) indexes have been found to react to the EUA market movements. This may serve as a hint for the growing importance of the price of carbon as an additional risk factor for businesses given that emission quotas are being consistently tightened every year.