Δρ. Dimitris Tsouknidis

In 2013, the European Union’s Emission Trading Scheme (EU-ETS) entered Phase III. Τhe majority of emission permits in Phase III are auctioned instead of being allocated for free as in Phases I and II. Using a difference-in-differences method, we show that this change has led to an increase in the financial distress risk of the EU-ETS-regulated firms when compared to unregulated firms, suggesting that the EU-ETS imposes a significant financial burden for regulated firms. This result is robust to an array of validation tests, alleviating concerns that it is driven by unobserved factors. In additional analyses, we show that the increase in distress risk of regulated firms during Phase III can be explained by two main mechanisms, (i) an additional cash outflow to purchase pollution permits and (ii) a low average environmental score that possibly (via high sustainability risk) lowers investors expectations regarding firms’ performance.

Date: 20 May 2022

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