Does EU emissions trading bite? An event study

• Firms are more positively valued with lower carbon-intensities of production.
• Firms are more negatively valued with smaller holdings of allowances.
• The stock market does not value the firms׳ allowance trade activity.
• The stock market does not seem to value the pass-through of carbon costs in product prices.

The aim of this paper is to examine whether shareholders consider the EU Emissions Trading Scheme (EU ETS) as value-relevant for the participating firms. An analysis is conducted of the share prices changes as caused by the first publication of compliance data in April, 2006, which disclosed an over-allocation of emission allowances. Through an event study, it is shown that share prices actually increased as a result of the allowance price drop when firms have a lower carbon-intensity of production and larger allowance holdings. There was no significant value impact from firms׳ allowance trade activity or from the pass-through of carbon-related production costs (carbon leakage). The conclusion is that the EU ETS does ‘bite’. The main impact on the share prices of firms arises from their carbon-intensity of production. The EU ETS is thus valued as a restriction on pollution.