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The Effect of U.S. Climate Policy on Financial Markets: An Event Study of the Inflation Reduction Act

Author

Listed:
  • Bauer, Michael
  • Offner, Eric
  • Rudebusch, Glenn

Abstract

The Inflation Reduction Act of 2022 (IRA) represents the largest climate policy action ever undertaken in the United States. Its legislative path was marked by two abrupt shifts as the likelihood of climate policy action fell to near zero and then rose to near certainty. We investigate equity price reactions to these two events, which represent major realizations of climate policy transition risk. Our results highlight the heterogeneous nature of climate policy risk exposure. We find sizable reactions that differ by industry as well as across firm-level measures of greenness such as environmental scores and emission intensities. While the financial market response to the IRA was economically significant, it did not lead to instability or financial stress, suggesting that transition risks posed by climate policies even as ambitious as the IRA may be manageable.

Suggested Citation

  • Bauer, Michael & Offner, Eric & Rudebusch, Glenn, 2024. "The Effect of U.S. Climate Policy on Financial Markets: An Event Study of the Inflation Reduction Act," CEPR Discussion Papers 19755, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19755
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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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