The relationship among climate policy uncertainty and energy markets: fossil versus renewable and low‐carbon assets

Abstract

This paper investigates the intricate relationship between climate policy uncertainty (CPU) and energy market dynamics, focusing on fossil‐based and renewable/low‐carbon energy assets. Utilising a comprehensive dataset spanning from April 1987 to December 2023, comprising monthly observations of CPU, stock market returns, spot oil prices and various energy commodity futures, we employ time series regressions to analyse the effects of CPU on market returns. Our findings reveal that fossil‐based energy assets are significantly and negatively impacted by changes in CPU, while renewable and low‐carbon energy assets exhibit minimal or negligible effects. Moreover, we identify a heightened negative impact of CPU during periods of increased uncertainty, underscoring investor sensitivity to abrupt spikes in climate policy uncertainty, particularly in fossil‐based energy sectors. Robustness analysis confirms the efficacy of the CPU index as a reliable indicator, emphasising the importance of using comprehensive metrics to assess the influence of climate policy uncertainty on financial markets. Our study underscores the necessity for policymakers and industry stakeholders to recognise the implications of climate policy uncertainty on energy markets and prioritise efforts to establish clear and consistent policy frameworks to facilitate the transition to a more sustainable energy landscape.