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Connectedness and spillover effects of US climate policy uncertainty on energy stock, alternative energy stock, and carbon future

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Abstract

Global warming is pressuring policymakers to change climate policies in shifting the global economy onto a net-zero pathway. While financial assets are responsive to policy changes and development, climate change policies are becoming increasingly unpredictable, making policy decision less certain. This study investigates connectedness and spillover effects of US climate policy uncertainty on energy stocks, alternative energy stocks, and carbon emissions futures. We analyzed spillover and connectedness before and after the Paris Agreement. We employed monthly frequency data from August 2005 to March 2021 and applied DY (2012) method and MGARCH approach. We found that world energy stocks and carbon emissions futures are connected to US climate policy uncertainty. Uncertainty in climate policy and world energy stocks act as information transmitters in return spillover, while global alternative energy and carbon market are shock receivers. On volatility spillover, climate policy uncertainty, energy stocks, and carbon emissions future are shocks transmitters, while alternative energy stocks are receivers. We observe increase in connectedness following the Paris Agreement suggesting strengthened global efforts in tackling climate change. DCC and ADCC estimations revealed spillover effects of climate policy on futures returns and volatilities of world energy stocks and carbon emissions futures and the shocks could be transmitted through to the energy sector. During period of uncertainty in US climate policy, carbon allowances can potentially serve as a safe haven for energy stocks and provide downside protection for alternative energy stocks, hence hedging against climate transition risks.

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Notes

  1. “The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016. Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels” (UNFCCC 2016).

  2. Each variable in the reduced form VAR is expressed as a linear function of the other variables’ past values, its own past values, and a serially uncorrelated error term.

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Authors and Affiliations

  1. BRAC Business School, BRAC University, Dhaka, Bangladesh

    Mohammad Enamul Hoque

  2. Graduate School of Business, Universiti Kebangsaan Malaysia (UKM), Bangi, Malaysia

    Low Soo-Wah

  3. Faculty of Economics and Administrative Sciences, Erciyes University, 38039, Kayseri, Turkey

    Faik Bilgili

  4. University of Southampton, Malaysia Campus, Gelang Patah, Malaysia

    Md Hakim Ali

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  1. Mohammad Enamul Hoque
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  2. Low Soo-Wah
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Conceptualization: Mohammad Enamul Hoque, Low Soo-Wah; methodology: Mohammad Enamul Hoque, Low Soo-Wah; formal analysis and investigation: Mohammad Enamul Hoque, Low Soo-Wah, Faik Bilgili, Md Hakim Ali; writing—original draft preparation: Md Hakim Ali, Mohammad Enamul Hoque, Low Soo-Wah, Faik Bilgili; writing—review and editing: Mohammad Enamul Hoque, Faik Bilgili; resources: Mohammad Enamul Hoque, Low Soo-Wah, Md Hakim Ali; supervision: Faik Bilgili.

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Correspondence to Faik Bilgili.

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Hoque, M.E., Soo-Wah, L., Bilgili, F. et al. Connectedness and spillover effects of US climate policy uncertainty on energy stock, alternative energy stock, and carbon future. Environ Sci Pollut Res 30, 18956–18972 (2023). https://doi.org/10.1007/s11356-022-23464-0

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