The Impact of Carbon Allowance and Oil Prices on Low-Carbon Footprint Stocks: Evidence from RALS Cointegration Analysis

Abstract

This study analyzes the long-run relationships among the STOXX Low Carbon Footprint Price Index, oil prices, carbon allowance prices under the EU Emissions Trading System (EU ETS), and the STOXX 600 Technology Index over the period from February 9, 2016, to March 31, 2025. The aim is to understand how climate policy instruments and sectoral developments, particularly in technology and energy markets, influence low-carbon financial assets. The analysis applies the Residual Augmented Least Squares (RALS) cointegration method, which accounts for non-normal error distributions and higher-order moment conditions, offering advantages over traditional techniques. Unlike the Engle-Granger approach, which fails to detect a cointegrating relationship, RALS identifies a statistically significant long-term connection among the variables. Long-run coefficients are estimated using FMOLS, DOLS, and CCR methods, all of which reveal consistent and significant positive effects of the technology index, carbon allowance prices, and oil prices on the low-carbon footprint stock. Notably, the STOXX 600 Technology Index shows a stable coefficient of around 0.81, underscoring the sector's critical role in advancing low-carbon investments. The positive impact of carbon prices aligns with expectations about the incentivizing role of emissions trading, while higher oil prices appear to enhance the appeal of low-carbon assets, possibly due to substitution effects. These findings offer new empirical insights into the financial implications of climate policy and market dynamics, contributing to the literature and informing investors and policymakers focused on sustainable economic transition.