Wpływ Europejskiego Systemu Handlu Emisjami na wartość przedsiębiorstw
Authors: Witkowski Paweł 
Published: September 2024

In the mainstream economics there is assumed that all individuals maximizing their selfish goals contribute to maximizing social welfare. At the company level, this objective is formulated as maximizing shareholder value. This mechanism works, if there are no externalities, which can be said to occur when the actions of one entity cause costs or benefits to another economic entity and there is no compensation for the effects of that action. This leads to a sub-optimal allocation of resources and, as a result, maximum social welfare is not achieved.
An example of externalities is greenhouse gas emissions, which are linked to global warming. According to a special report by the Intergovernmental Panel on Climate Change (IPCC)1, a 1.5˚C increase in global warming will make extreme weather events more frequent and more widespread in their effects. Natural resources, ecosystems, biodiversity, food security &ndash; in a word, civilization &ndash; will suffer (IPCC, 2018).
However, global warming is not the only challenge of contemporary society. Unemployment, world hunger, inequality in general, armed conflicts or pandemics are all constraints on efforts to regulate greenhouse gas emissions. In the hierarchy of human needs, satisfying hunger is more important than breathing clean air or protecting the climate. Introducing regulations that will result in numerous company bankruptcies and mass redundancies will not find social acceptance. The market mechanism must be corrected and pressure put on businesses to take action to reduce emissions. However, this incentive must not be destructive to the economy. In addition, each country has different resources, is at a different level of economic development and, as a result, has different opportunities to reduce emissions. International cooperation is therefore essential. As de Schoutheete suggests, this can be compared to managing interdependence. For in the reality of political life we are dealing with a complex system of functional management of socio-economic interdependencies involving groups, communities, regions and nations in search of meaning and purpose (de Schoutheete, 1997, p. 149).
The best example of international cooperation on climate protection is the United Nations Framework Convention on Climate Change (hereinafter UNFCCC or Climate Convention). In the framework of the Climate Convention, parties declare and negotiate emission reduction commitments, which are then attached as protocols or contributions to a binding agreement. Both the European Union (EU) and its individual members are parties to the UNFCCC. The European Emissions Trading Scheme (hereinafter referred to as the EU ETS) is the main tool for implementing the commitments undertaken by the EU and its members in the Kyoto Protocol to the UNFCCC. The system was established on 13 October 2003 (Directive 2003/87/EC) and became operational in January 2005. It covers about 45% of all greenhouse gas emissions in the EU. The EU&rsquo;s target under the EU ETS was to achieve emissions 21% lower than in 2005 by 2020. The post-2020 assumptions were revised in July 2015. It was determined that the sectors covered by the scheme by 2030 would have to reduce emissions by 43% compared to 2005.
The question arises as to whether the EU&rsquo;s objectives are not too ambitious and undermine social welfare. An assessment of the impact of the EU ETS on businesses may provide an answer to this question. While paying attention to the objective of companies, this assessment must deal with their value. This choice also reinforces the synthetic nature of this financial category, which is the resultant of all spheres of a company&rsquo;s operation2. The introduction of corrective regulations should increase the value of some companies and decrease that of others. The only negative impact of the regulations on the value of enterprises can therefore be equated with a decrease in social welfare in material terms.
Assessing the impact of the introduction of the EU ETS on company value is a huge challenge, as the issue is multi-faceted and interdisciplinary. Therefore, solving the problem required dividing the research into several stages and adopting several, inherently debatable, assumptions. In the first chapter the fundamental significance of the surplus rate, i.e. the difference between profitability and the cost of capital, for the value of a company was proved. An in-depth assessment of the impact of the introduction of the EU ETS on company value can therefore be based on this financial category. It has also been noted that emission allowances have many characteristics of taxes. As a result, the important methodological reference of the thesis to theories directly and indirectly explaining the relationship between taxes and firm value was justified. This is of considerable importance as the relationship between taxes and company value has a very strong theoretical basis, as evidenced, for example, by theories of company valuation. In the case of the impact of greenhouse gas emission allowances on company value, the acquis on international tax competition and tax incidence (tax shifting) can be particularly useful. If international competition in environmental regulation was unfair, then the introduction of the EU ETS should affect company value. However, the ability of companies to shift costs forward and/or backward is a constraint. In th is aspect, it is reasonable to refer to tax incidence studies based on the analysis of the profitability of companies. On the one hand, they enrich the existing research on the phenomenon of cost shifting of emission allowances. On the other hand, they correspond to the excess return component.
The discussion in chapter two shows that there are numerous forms of environmental regulations in the world. However, it is difficult to assess whether they ensure fair international competition. Even similar regulations (e.g. organised emissions trading) have numerous exceptions and detailed rules. Moreover, all regulations have been subject to numerous modifications over the years. The design of the EU ETS includes a number of mechanisms to protect participants in the system from loss of competitiveness, as well as rules that respect their diversity (national and sectoral). However, not all differences between enterprises have been taken into account, especially those related to the size of enterprises. Large companies are more active in the allowance market, use more sophisticated tools to manage their emissions and have lower measurement, reporting and verification costs per tonne of carbon emitted. They may therefore experience unintended benefits or disproportionate cost-sharing. Moreover, the cost-effectiveness of investments resulting in greenhouse gas reductions is linked to the individual characteristics of companies. Therefore, the assessment of the impact of emission allowances on company value has to be carried out at the microeconomic level.
The review of the literature on the impact of the EU ETS on broadly defined company value, made in the third chapter demonstrates the uncoordinated and fragmented nature of these studies. Of particular importance, however, is the research on profitability and the cost of capital. As proved in the first chapter, profitability, cost of capital and enterprise value are all in a strong relationship with each other, which under several assumptions takes the form of a functional relationship. It is possible to formulate a consistent and theoretically firmly grounded method of analysing the impact of emission allowances on company value.
First, it was decided to analyse the impact of allowances on corporate profitability. Following the example of Krzyżaniak and Musgrave&rsquo;s study on the tax incidence, a variable was included which represents the ratio of the size of the &ldquo;tax liability&rdquo; due to the need to purchase allowances (EUAs) to the invested capital. This variable took the form of the ratio of missing emission allowances to total assets. For the selection of control variables, research in resource-based organizational theory was primarily used. This choice was supported by a large number of papers in which corporate profitability was the explained variable.
The study of the impact of emission allowances on the profitability of enterprises was carried out on a balanced sample of 1,083 enterprises, in 2008&ndash;2016 (the number of observations was 9,747). The information used in the analysis came from two sources &ndash; the ORBIS database and the database of the Directorate-General for the Environment of the European Commission. The analyses of the impact of emission allowances on profitability in the short term (Arellano-Bond and Blundell-Bond models) show that after including in the model a variable representing the change in sales revenues, the examined variable (the ratio of missing emission allowances to the value of assets) ceases to be statistically significant. In contrast, including only productivity in the model was devoid of such an effect3. This means that in the short term, enterprises mainly shift the cost of allowances by changing the price of their products, while productivity takes time to improve.
The long-run study shows that the ratio of missing allowances to total assets had a significant positive impact on companies&rsquo; profitability. This may imply that companies had the ability to shift the cost of allowances and did so with a surplus. This result would be consistent with the conjecture appearing in the literature that companies would pass on allowance costs to consumers by raising prices. However, when a variable representing the change in sales revenues was placed in the model, the directional coefficient of the variable under study (the ratio of missing allowances to assets) was only slightly reduced and the variable remained statistically significant. Only by controlling for productivity did this variable cease to be statistically significant. In conclusion, the detected positive effect of emission allowances on profitability in the long run was not only due to possible price increases, but was mainly due to productivity improvements.
In order to avoid survival bias (conducting analyses only on a sample of companies that did not go bankrupt as a result of the introduction of the EU ETS), I repeated the study on an unbalanced sample (the number of observations was 23,747). The analysed variable remained statistically significant despite simultaneous control of the change in sales revenues and productivity. In order to exclude the effect of larger sample (more degrees of freedom), it was decided to analyse whether the sign of the variable is significant. After a more detailed analysis it turned out that the ratio of missing allowances to total assets significantly influenced profitability, but only when the emission was lower than the free allocation (the variable took negative values), i.e. in the situation of decreasing production scale4. On the balanced sample this variable was insignificant for both positive and negative values. This implies that there may occur survival error in the relationship under study and further research should be conducted on unbalanced samples.
As a second step, a study of the impact of emission allowances on value was conducted through the impact of emission allowances on the cost of equity capital. Due to the onus on companies to purchase the missing allowances, capital providers are burdened with the risk of the price of emission allowances (market price). It was concluded that there is reason to believe that carbon risk is systematic and can affect the cost of equity. It was decided to use the sorted portfolio technique as a methodological tool. The analyses were based on the CAPM and the multivariate Fama and French models (three, four and five factor). The use of the sorted portfolios technique requires the adoption of a criterion for allocation to portfolios that should reflect the enterprise&rsquo;s exposure to the risk being valued (risk premium). The ratio of missing allowances to total assets was considered to meet such requirements.
The study of the impact of the EU ETS operation on the cost of equity capital was conducted over the period 2002&ndash;2019, on a sample of 98 companies. Using the sorted portfolios technique, no statistically significant carbon premium was found for the entire study period (2004&ndash;2019). However, a statistically significant carbon premium was detected in some sub-periods. A positive carbon premium was found in 2004&ndash;2007, while a negative one was found in 2008&ndash;2012. A statistically significant carbon premium in the 2013&ndash;2019 period was observed after excluding from the sample the 10% of companies with the highest ratio of missing allowances to total assets. As it was found, the presence of these companies in the sample distorts the results, as these companies are characterised by a high CRER while having a low alpha coefficient. This is probably due to the fact that these are companies that own their own power plants and therefore have the ability to shift costs or benefit from synergy effects. At the same time, analyses were carried out using alternative portfolio sorting criteria (e.g. ratio of emissions to total assets, ratio of emissions to operating income). No big differences in results were found. However, the best criterion proved to be operational emissivity (ratio of emissions to operating income).
The analyses carried out culminated in the assessment of the relationship between emission allowances and excess rate of return. As concluded, only a study based on simultaneous analysis of the impact of the examined variable (the ratio of missing emission allowances to the value of assets) on profitability and cost of capital allows assessing whether there is a relationship between the functioning of the EU ETS and the value of enterprises. Both ROE and cost of equity were calculated for individual years. The CAPM market model was used to calculate the beta coefficient; calculations were made on weekly returns. The first step was to analyse the relationship between the ratio of missing allowances to asset size and return on equity. Conducting, in the first instance, analyses of the impact on profitability was necessary in order to draw clear conclusions regarding the impact on excess rate of return. Regardless of the model configuration, no significant relationship was detected between these variables (including whether or not the change in sales and/or productivity was controlled for).
Then, the study was repeated, in which the explained variable was the excess rate of return. The relationship between the excess rate of return and the ratio of missing emission allowances to total assets turned out to be statistically significant in every configuration. It was surprising to find that this relationship was significant only in the case when the emission of greenhouse gases was higher than the free allocation (positive values)5. Moreover, the directional coefficient at this variable was negative. This means that the more greenhouse gases a company emitted in relation to its allocation, the lower the excess rate was. Putting together the estimation results for ROE and surplus rate, it can be assumed that companies are offsetting the cost of missing allowances, although investors anticipate that this capacity has its limits and is fraught with risk, for which they expect an additional premium. There is therefore a reasonable assumption that, overall, the operation of the EU ETS has resulted in a loss of value for companies in the long term.
The research carried out shows that the concept of the excess rate based on the theory of discounted financial flows and the assumptions of the single-phase model can be the basis for assessing the impact of the introduction of the EU ETS on the value of enterprises (as well as other regulations of this type in the world). Strong theoretical foundations and the fact that there are reference studies for its components speak in favour of the examination of the excess rate of return. Therefore, it is not a concept without references.
In further research, it would be advisable to supplement the analyses carried out with the impact of the variable under study on the reinvestment rate, as it complements the theoretical concept and the conclusions drawn6. Moreover, the analyses carried out can be repeated for other emissions trading systems operating in the world. It would be advisable to calculate the cost of equity in the surplus rate study using a different valuation model.
In modelling the components of the excess rate (profitability and cost of capital), both control variables and the variable representing the impact of the EU ETS operation may be subject to modification. In the models which assess the relation between emission allowances and profitability, the non-linearity of this relation should certainly be verified. In addition, it is worth carrying out analyses by checking selected sectors. Finally, it would be necessary to prove the causality of the dependencies detected, which may be done, for instance, by means of factor analysis and structural models. These techniques would also allow us to confirm the importance of productivity and sales revenue changes for the relationship of the analysed variable with profitability and surplus rate. It is an open question whether productivity and change in sales revenues are control variables, mediators or moderators.
Research on the carbon premium should be conducted using other theoretical models to negate the risk of association with the other risk premiums identified in theory. If the sample was much larger, it would be advisable to conduct studies using panel models.