How do Spanish polluting sectors' stock market returns react to European Union allowances prices? A panel data approach

Abstract

This paper analyses whether and to what extent the EUA (European Union allowance) prices may be linked with Spanish polluting sectors' stock market returns.By utilizing a multifactor market model specification and panel data econometric approach, we test the if EUA price changes and stock returns of the Spanish sectors affected by EU ETS are correlated, the direction of this correlation and whether the carbon market effect is asymmetric and sector-specific. We use daily data for the full Phase II period and part of Phase III period of the EU ETS (from the 1st January 2008 to the 18th September 2015).A statistically significant positive and negative impact of EU ETS on stock market return is found for Phase II and III respectively. Additionally, EUA prices effect is shown to be sector-specific and there are different responses to increasing and decreasing carbon prices in sector-specific stock returns for both commitment periods.In contrast to others studies which refer to the first and/or earlier years of second EU ETS period and to a single sector (mainly power), our paper focuses on the second and the ongoing third period, and includes all polluting sectors encompassed under EU ETS.