Global Spillovers of US Climate Policy Risk: Evidence from EU Carbon Emissions Futures
25 Pages Posted: 28 Jul 2022 Last revised: 5 Aug 2022
Date Written: July 22, 2022
Mitigating climate change is a global public good to which many different countries contribute. The incentive of each country to contribute through the provision of effective climate policies depends on other countries’ contributions. Climate policy risk spillovers arise when expected changes to climate policy stringency in one country affect expected climate policy stringency in another country. We present evidence for the existence of such climate policy risk spillovers from the United States (US) to the European Union (EU). Using an event study approach, we find significant effects of US climate policy events on the price of EU emission allowances (EUA): US policy events that signal weaker US commitment to climate protection decrease the price of EUA futures while US policy events that signal stronger US commitment to climate protection increase the price of EUA futures. This evidence is in line with the notion that financial markets expect EU climate policy to follow the direction of US policy. More broadly, our results point to the importance of regulatory risk spillovers that affect global climate policy coordination.
Keywords: EU emission allowances, US climate policy, climate policy coordination, regulatory risk, political uncertainty
JEL Classification: F64, H23, Q58
Suggested Citation: Suggested Citation