Investigating the Impact of EU ETS Allowances on the Capital Market – The Case of German Companies

Abstract

To achieve the international targets for limiting carbon emissions the Emissions Trading System of the European Union (EU ETS) was implemented. Considering the crucial role of this system in the process of decarbonization of the economy, it is essential to investigate whether and to what extent there is an impact on the capital market. To investigate this, the dataset of 38 German companies from 2013 until 2020 is used. The data set consists of paid allowances, free allowances, stock prices, return on assets (ROA) ratio, and dividend payouts. The study uses three econometric methods for panels including the pooled ordinary least squares, the fixed effects model, and the random effects model. In addition, the F-test and Hausman tests are used, to determine which method is more appropriate. The results show that the ordinary least square (OLS) model and fixed effect model are most suitable for the stock price estimation and confirm the negative impact of free allowances on stock prices. A random effect is considered for the ROA and dividend estimation, confirming the negative impact of free allowances on the ROA ratio and the positive on the dividend distributions.