Stock Market Reactions to EU ETS Reforms: An Event Study and Regression Analysis of the Market Stability Reserve's Impact on European Utility Firms

Abstract

This thesis investigates how European equity markets responded to the Market Stability Reserve (MSR), a landmark reform of the EU Emissions Trading System (EU ETS) designed to address surplus allowances and stabilize carbon pricing. The study focuses on three critical milestones: the ENVI Committee approval on May 6, 2015, the European Parliament adoption on July 8, 2015, and the full implementation on January 1, 2019. Using a Fama-French three-factor model and symmetric event windows of 1, 3, 5, and 10 days, I analyze abnormal and cumulative abnormal returns (ARs and CARs) for 117 EU-listed electric utilities and independent power producers (IPPs). A subsample of 40 firms is further examined through cross-sectional regression to test how firm-level characteristics explain variations in CARs. The findings indicate that, while market-wide abnormal returns were modest at the legislative milestones and largely absent at implementation, the MSR still shaped short-term equity dynamics. Liquidity consistently emerged as a significant predictor of firm-level reactions, underlining the role of trading conditions in determining how quickly climate policy signals are incorporated into stock prices. In contrast, environmental scores, leverage, volatility, and beta did not significantly explain short-term variations, suggesting that sustainability-related attributes may influence pricing over longer horizons. By showing that markets priced the MSR gradually rather than through sharp repricing, this thesis contributes to the literature on sustainable finance and climate policy. It demonstrates that climate reforms influence financial markets in nuanced ways, with liquidity acting as a critical transmission channel for short-run reactions, while broader sustainability factors appear to be absorbed more progressively.