Climate Uncertainty and Carbon Emissions Prices: The Relative Roles of Transition and Physical Climate Risks

Serda Ozturk (serda.ozturk@bilgi.edu.tr), Riza Demirer and Rangan Gupta
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Serda Ozturk: Department of Business and Finance, Istanbul Bilgi University, Eyup, Istanbul 34060, Turkey

No 202215, Working Papers from University of Pretoria, Department of Economics

Abstract: This study examines the role of climate uncertainty over price volatility in the carbon emissions market 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)
Pages: 10 pages
Date: 2022-02
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Journal Article: Climate uncertainty and carbon emissions prices: The relative roles of transition and physical climate risks (2022)
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