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Use of Mulifactor Models with Garch Structure in Carbon Emissions Risk Management

Abstract Tightening the environmental norms that result from the priorities of the EU 2030 Energy and Climate Package and the reform of the EU ETS have caused the necessity to implement an effective system of managing the risk of carbon dioxide emission and integrate it with the existing enterprise management system. Evaluation of the direction and strength of correlation between EUA price changes and energy companies stock price returns is crucial from point of view the managerial staff making proper decisions about the use of the CO2 emission permits by energy companies. It is an important stage of carbon emission risk management process. The aim of this paper is to verify the possibility of use the multifactor models with GARCH structure as a tool supporting the carbon emission management process in energy companies. Empirical analysis is connected with the estimation of multifactor models with GARCH structure in the Phase II and Phase III of the EU ETS functioning for two groups of Polish energy companies: group of the Respect Index companies and others. Such an approach allows to check whether the Respect Index companies are more robust than others on the carbon emission risk, in particular the EUA price risk associated with the intensification works on modifying the EU ETS functioning. We found that the impact of EUA price changes on energy companies stock returns and their volatility is statistically insignificant in case of all Respect Index companies.