The Different Reaction of Energy Stock on Carbon Market: Does EU Ets Provide Enough Incentive for Clean Energy Investment?

Abstract

Since carbon emission trading place an important role in energy sector in EU. This paper tries to examine the correlation between energy stock and carbon price. We divided energy stock into new and conventional to observe their different reaction on carbon price. EU ETS is designed to increase the emission cost of conventional energy, and incent new/clean energy investment. In indicates that an increasing carbon price will reduce the profitability of conventional energy producer, and increase the revenue of new energy producer who sell allowance and/or credit. It should create a competitive advantage for new energy company for attracting more investment. However, our quantitative analysis showed counter-intuitive phenomenon that when carbon price rise, new energy stock falls, but conventional energy stocks rise. We provide our explanation by showing the carbon market is a buyer’s market of conventional energy company, and pointed out that new energy producer hard to expand productivity is the main cause of losing investment. Our results consist with Blanco & Rodrigues’s policy analysis that EU ETS does not provide enough incentive for new/clean energy investment.