Climate uncertainty and carbon emissions prices: The relative roles of transition and physical climate risks

Serda Selin Ozturk, Riza Demirer and Rangan Gupta

Economics Letters, 2022, vol. 217, issue C

Abstract: This study examines the role of climate uncertainty on carbon emissions price dynamics using novel measures of uncertainty that capture transitional and physical climate risks. Applying a multivariate stochastic volatility model to daily European Union Allowance prices, we show that climate uncertainty indeed serves as a significant driver of price fluctuations in emissions prices with physical climate risks associated with uncertainty surrounding natural hazards playing a more dominant role over policy uncertainty in recent years. While our findings highlight the growing role of public concern over global warming and climate hazards than policy aspects as a driver of pricing dynamics in the emissions market, our findings present an interesting opening for hedging strategies towards attaining decarbonization goals in investment positions.

Keywords: Climate risk; Carbon prices; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: C15 O13 Q54 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Climate Uncertainty and Carbon Emissions Prices: The Relative Roles of Transition and Physical Climate Risks (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:217:y:2022:i:c:s0165176522002324

DOI: 10.1016/j.econlet.2022.110687

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