Trump vs. Paris: The Impact of Climate Policy on U.S. Listed Oil and Gas Firm Returns and Volatility

34 Pages Posted: 2 Jun 2020

See all articles by Ivan Diaz-Rainey

Ivan Diaz-Rainey

CEFGroup & Department of Accountancy and Finance, University of Otago

Sebastian Gehricke

affiliation not provided to SSRN

Helen Roberts

University of Otago - Department of Accountancy and Finance

Renzhu Zhang

University of Otago - Department of Accountancy and Finance

Date Written: June 2, 2020

Abstract

We explore the stock market and option implied volatility response of the oil and gas industry to four policy events associated with the Paris Agreement and the election of Donald Trump. Our results show that the signing of the Paris Agreement had a large negative impact for the Oil and Gas sector (CAAR -8.4%), with Exploration and Production (CAAR -12.2%) and Drilling (CAAR -10.5%) most severely affected. This is further supported by an increase in implied volatility and by a structural break in option trader sentiment around the signing of the agreement. In general, the Paris Agreement had a much stronger impact on firms that had primarily U.S.-focused operations. Contrary to expectations, the election of Donald Trump and the announced withdrawal of the U.S. from the Paris Agreement negatively affected some sub-sectors (transport and integrated) and the sector overall. We attribute this to (1) Trump’s policies supporting domestic production (benefitting unlisted independent producers at the expense of listed competitors with import and international assets), and (2) on “We Are Still In” efforts by U.S. states, cities and companies to continue to meet Paris Agreement goals. Overall, our results indicated that investors are pricing current policies when examining climate risk and that, in this respect, the Paris agreement trumped Trump.

Keywords: Climate risk; Oil and gas firms; Option implied volatility; Stranded assets valuation; Event study

JEL Classification: G12; G13; G14; G18; L91; Q54

Suggested Citation

Diaz-Rainey, Ivan and Gehricke, Sebastian and Roberts, Helen and Zhang, Renzhu, Trump vs. Paris: The Impact of Climate Policy on U.S. Listed Oil and Gas Firm Returns and Volatility (June 2, 2020). USAEE Working Paper No. 20-451, Available at SSRN: https://ssrn.com/abstract=3617182 or http://dx.doi.org/10.2139/ssrn.3617182

Ivan Diaz-Rainey (Contact Author)

CEFGroup & Department of Accountancy and Finance, University of Otago ( email )

Dunedin
New Zealand

Sebastian Gehricke

affiliation not provided to SSRN

Helen Roberts

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand
6434798072 (Phone)
6434798171 (Fax)

Renzhu Zhang

University of Otago - Department of Accountancy and Finance ( email )

Dunedin
New Zealand
+64274917441 (Phone)

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