Global Spillovers of US Climate Policy Risk: Evidence from EU Carbon Emissions Futures

Abstract

International climate policy risk spillovers arise when expected changes to climate policy stringency in one country affect expected climate policy stringency in another country. We develop an event study procedure that allows us to identify such spillovers in emission trading systems. Using our methodology to test for climate policy risk spillovers from the United States (US) to the European Union (EU), we find that financial markets expect EU regulators to follow the direction of US climate policy. Our results highlight the importance of regulatory risk spillovers in the context of global climate policy coordination.

Keywords: EU emission allowances, US climate policy, emissions trading, regulatory risk, political uncertainty, climate policy coordination, dynamic model averaging

JEL Classification: C53, F64, G14, Q58