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

Energy Economics, volume 139, 2024[10.1016/j.eneco.2024.107931]

21 Pages Posted: 28 Jul 2022 Last revised: 3 May 2023

See all articles by Micah Fields

Micah Fields

Miami University of Ohio - Department of Economics

David Lindequist

Miami University - Department of Economics

Date Written: July 22, 2022

Abstract

International climate policy risk spillovers occur when expected changes to climate policy stringency in one country affect expected climate policy stringency in another country. We develop an event study procedure to identify such spillovers in emissions trading systems, specifically examining the impact from the United States (US) to the European Union (EU). Distinguishing between policy events likely to reduce US commitment to climate action (‘brown events’) and those likely to increase it (‘green events’), we find that the average brown US policy event is associated with an anticipated increase in future EU carbon permit supply, leading to a cumulative 7.1% drop in EU carbon prices over the event window. Conversely, green US policy events are linked to an expected decrease in future EU permit supply, resulting in a cumulative 4.7% rise in EU carbon prices. These findings suggest that financial markets anticipate EU regulators to align with the direction of US climate policy. Our results underscore the significance of regulatory risk spillovers in 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

Suggested Citation

Fields, Micah and Lindequist, David, Global Spillovers of US Climate Policy Risk: Evidence from EU Carbon Emissions Futures (July 22, 2022). Energy Economics, volume 139, 2024[10.1016/j.eneco.2024.107931], Available at SSRN: https://ssrn.com/abstract=4170198 or http://dx.doi.org/10.1016/j.eneco.2024.107931

Micah Fields

Miami University of Ohio - Department of Economics ( email )

208 Laws Hall
Oxford, OH 45056
United States

David Lindequist (Contact Author)

Miami University - Department of Economics ( email )

83 N Patterson Ave
Oxford, OH 45056
United States

HOME PAGE: http:///www.david-lindequist.com/

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