Global spillovers of US climate policy risk: Evidence from EU carbon emissions futures

Micah Fields and David Lindequist

Energy Economics, 2024, vol. 139, issue C

Abstract: International climate policy risk spillovers occur when expected changes to climate policy stringency in one country affect expected climate policy stringency in another country. We develop an event study procedure to identify such spillovers in emissions trading systems, specifically examining the impact from the United States (US) to the European Union (EU). Distinguishing between policy events likely to reduce US commitment to climate action (‘brown events’) and those likely to increase it (‘green events’), we find that the average brown US policy event is associated with an anticipated increase in future EU carbon permit supply, leading to a cumulative 7.1% drop in EU carbon prices over the event window. Conversely, green US policy events are linked to an expected decrease in future EU permit supply, resulting in a cumulative 4.7% rise in EU carbon prices. These findings suggest that financial markets anticipate EU regulators to align with the direction of US climate policy. Our results underscore the significance of regulatory risk spillovers in global climate policy coordination.

Keywords: EU emission allowances; US climate policy; Emissions trading; Regulatory risk; Political uncertainty; Climate policy coordination; Dynamic model averaging (search for similar items in EconPapers)
JEL-codes: C53 F64 G14 Q58 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:139:y:2024:i:c:s014098832400639x

DOI: 10.1016/j.eneco.2024.107931

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