An Assessment of the Periodical Success of the EU ETS Phase III from Two Perspectives: The Market Efficiency and the Firm-level Consequence

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This study proposed two criteria to assess the periodical success of the EU Emission Trading Scheme (EU ETS) Phase III: the market efficiency and the economic consequences of the EU ETS on the firm level. First, the carbon allowance spot market and the futures market are investigated to test the market efficiency. The empirical results derived from the Augmented Dickey-Fuller test, the Phillips–Perron test, the Lo & MacKinlay Variance Ratio test, and the Autoregressive Integrated Moving Average model (ARIMA) approach provide significant evidence that the carbon market is satisfied with the weak-form market efficiency. Second, a sample covering 125 companies from 4 sectors and listed in 13 countries are employed to test the effect of the EU ETS allowance price on the regulated stock market returns. This study finds that the carbon price returns have a positive relationship with the regulated firm’s stock returns under the EU ETS phase III by employing the multifactor two-way fixed effect models. The findings of this study could benefit the regulated entities to make their abatement decisions, the stakeholder to diversify their carbon risks, and the policymaker to adjust their carbon regulations to meet the emission reduction target in a cost-efficient approach successfully. Keywords: EU ETS, Carbon Market, Decarbonization, Market Efficiency, Stock Returns
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