Carbon Regulation, Economic Competitiveness, and Corporate Expected Return: An Empirical Study

Abstract

In this thesis we estimate the effect of carbon regulation on business competitiveness using carbon price as indication of regulatory intensity and stock price as inference for expected business competitiveness. Two different models are used. The first one focuses on the country and sector specific effects of carbon price by assessing how changes in carbon price affect changes in sector level stock price. Sectorial level daily data between 2009 and 2010 in EU and US are used to estimate the effect of carbon regulation on directly regulated sectors (i.e. utility, oil and gas exploration and production) and indirectly related sectors (i.e. oil and gas equipment and service, alternative energy, and airlines). The second model studies the general effects of carbon regulation on firm competitiveness for the same period. Eleven sectors in the G20 countries are used and the effects of carbon price changes on three main industry characteristics are assessed: firm mobility, market competition and existence of carbon regulation. These frameworks allow us to analyze the spillover effect of carbon regulations on business competitive advantage in regulated and unregulated economies. We employ time series techniques and report statistically valid estimates by industry and country for the first model, and by industry characteristics for the second model. The results show that carbon regulation in EU has significant effects on the expected returns of some directly regulated and unregulated EU and US sectors, but not for all. The overall effect of carbon regulation on stock returns is negative. Therefore we conclude that regulation intensity tends to have negative effects on business competitiveness.

Date of Award	2011
Original language	American English
Supervisor	I-tsung Tsai (Supervisor)