Does the EU Emissions Trading System Influence the Valuation of European Firms

Abstract

This thesis investigates the impact of the European Union Emissions Trading System (EU ETS) on the firm value of companies listed on the STOXX 600 Europe index, using Tobin’s Q as the valuation metric. Covering the period from 2012 to 2022, the research spans the three latter phases of the EU ETS, focusing on 827 firms. EU Allowance (EUA) prices are used as the primary independent variable to assess the influence of the EU ETS, complemented by various financial indicators to make the results more accurate. The empirical results indicate that while the EU ETS correlates positively with the broader European market, it has a distinctly negative impact on firms directly subject to the system. This trend is more pronounced when considering the costs of emissions and the volatility of EUA prices. After the introduction of the Market Stability Reserve (MSR) in 2019, subject firms are shown to decrease in value compared to the wider market. Furthermore, the study relates the empirical findings to the possibility of asset stranding induced by a stringently evolving ETS. These findings underscore the need for policies that facilitate a transition to a low-carbon economy, supporting industries in mitigating financial risks associated with environmental compliance.