Journal
EUROPEAN JOURNAL OF FINANCE
Volume 26, Issue 1, Pages 1-13Publisher
ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
DOI: 10.1080/1351847X.2019.1637358
Keywords
Oil price shocks; emissions trading system; structural VAR; European stock returns
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This paper examines whether oil price shocks of different origin affect the price of carbon emission allowance traded under the European Union's Emissions Trading System; leading to changes in aggregate and sector-specific European equity returns. The results show that an unexpected oil-supply disruption has an imminent but weak positive effect on carbon emission price, while a positive aggregate demand shock has a strong positive effect on carbon emission price. By contrast, a positive oil-specific (precautionary) demand shock has a negative but weak effect on carbon emission price. These findings are economically important as positive shocks on the emission allowance price trigger a decrease on the aggregate stock return of the European equity market, albeit they trigger a large and persistent increase on European equity returns of oil-related industries with the exception of the Energy sector.
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