Causality between CO2 Emissions and Stock Markets

Chia-Lin Chang (), Jukka Ilomäki, Hannu Laurila and Michael McAleer
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Hannu Laurila: Faculty of Management and Business, Tampere University, FI-33014 Tampere, Finland

Energies, 2020, vol. 13, issue 11, 1-14

Abstract: It is generally accepted in the scientific community that carbon dioxide (CO2) emissions, which lead to global warming, arise from using fossil fuels, namely coal, oil and gas, as energy sources. Consequently, alleviating the effects of global warming and climate change necessitates substantial reductions in the use of fossil fuel energy. This paper uses a financial market-based approach to investigate whether positive stock returns cause changes in CO2 emissions, or vice-versa, based on the Granger causality test to determine cause and effect, or leader and follower. If Granger causality can be determined in any direction, this will enable a clear directional statement regarding temporal predictability between stock returns and CO2 emissions. The empirical data include annual CO2 emissions from fuel combustion of the three main fossil energy sources, namely coal, oil and gas, based on 18 countries with sophisticated financial markets that are in the Morgan Stanley Capital International (MSCI) World Index from 1971 to 2017. The empirical results show clearly that all the statistically significant causality findings are unidirectional from the stock market returns to CO2 emissions from coal, oil and gas, but not the reverse. More importantly, the regression results suggest that when stock returns rise by 1%, CO2 emissions from coal combustion decrease by 9% among the countries that are included in MSCI World Index. Furthermore, when stock returns rise 1%, CO2 emissions from oil combustion increase by 2%, but stock returns have no significant effect on CO2 emissions from gas combustion.

Keywords: global warming; climate change; carbon emissions; fossil fuels; sophisticated financial markets; stock market returns; Granger causality; predictability (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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