Does carbon asset add value to clean energy market? Evidence from EU

Abstract

This paper examines if clean energy stocks help investors in managing carbon risk. We use the price of the European Union Allowance (EUA) and European clean energy index (ERIX) for the three phases of the EU-Emission Trading Scheme. Analyzing the time-varying correlation and volatility of EUA stock and ERIX through generalized orthogonal GO-GARCH model, the empirical results reveal relative independence of the European renewable energy market from the carbon market providing diversification benefits and value addition by including carbon assets in clean energy stock portfolio. Furthermore, three portfolios with different weight allocation strategies reveal that the carbon asset provides risk and downside risk benefits when mixed with a clean energy stock portfolio. These results are useful for investors who enter the market for value maximization and the regulators striving to make strategies for managing carbon risk.

Keywords

• european union allowance (eua)
• european clean energy index (erix)
• go-garch
• carbon risk
• portfolio diversification