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Climate Uncertainty and Carbon Emissions Prices: The Relative Roles of Transition and Physical Climate Risks

Author

Listed:
  • Serda Selin Ozturk

    (Department of Business and Finance, Istanbul Bilgi University, Eyup, Istanbul 34060, Turkey)

  • Riza Demirer

    (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

Abstract

This study examines the role of climate uncertainty over price volatility in the carbon emissions market using novel measures of uncertainty that capture transitional and physical climate risks. Applying a multivariate stochastic volatility model to daily European Union Allowance prices, we show that climate uncertainty indeed serves as a significant driver of price fluctuations in emissions prices with physical climate risks associated with uncertainty surrounding natural hazards playing a more dominant role over policy uncertainty in recent years. While our findings highlight the growing role of public concern over global warming and climate hazards than policy aspects as a driver of pricing dynamics in the emissions market, our findings present an interesting opening for hedging strategies towards attaining decarbonization goals in investment positions.

Suggested Citation

  • Serda Selin Ozturk & Riza Demirer & Rangan Gupta, 2022. "Climate Uncertainty and Carbon Emissions Prices: The Relative Roles of Transition and Physical Climate Risks," Working Papers 202215, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202215
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    References listed on IDEAS

    as
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    Cited by:

    1. Zhao, Wanli & Zhai, Xiangyang & Ji, Qiang & Liu, Zhenhua, 2024. "Measuring crisis from climate risk spillovers in European electricity markets," Energy Economics, Elsevier, vol. 134(C).
    2. Ayad, Hicham & Abbas, Shujaat & Nakhli, Mohamed Sahbi & Jibir, Adamu & Shahzad, Umer, 2023. "Industrial growth, health care policy uncertainty and carbon emissions: Do trade and tax policy uncertainties matter for sustainable development in the USA?," Structural Change and Economic Dynamics, Elsevier, vol. 66(C), pages 151-160.
    3. Wang, Kai-Hua & Wang, Zu-Shan & Yunis, Manal & Kchouri, Bilal, 2023. "Spillovers and connectedness among climate policy uncertainty, energy, green bond and carbon markets: A global perspective," Energy Economics, Elsevier, vol. 128(C).
    4. Tedeschi, Marco & Foglia, Matteo & Bouri, Elie & Dai, Peng-Fei, 2024. "How does climate policy uncertainty affect financial markets? Evidence from Europe," Economics Letters, Elsevier, vol. 234(C).
    5. Pham, Linh & Kamal, Javed Bin, 2024. "Blessings or curse: How do media climate change concerns affect commodity tail risk spillovers?," Journal of Commodity Markets, Elsevier, vol. 34(C).
    6. Ma, Dandan & Zhang, Yunhan & Ji, Qiang & Zhao, Wan-Li & Zhai, Pengxiang, 2024. "Heterogeneous impacts of climate change news on China's financial markets," International Review of Financial Analysis, Elsevier, vol. 91(C).
    7. Donglan Liu & Xin Liu & Kun Guo & Qiang Ji & Yingxian Chang, 2023. "Spillover Effects among Electricity Prices, Traditional Energy Prices and Carbon Market under Climate Risk," IJERPH, MDPI, vol. 20(2), pages 1-18, January.
    8. Goodell, John W. & Nammouri, Hela & Saâdaoui, Foued & Ben Jabeur, Sami, 2023. "Carbon allowances amid climate change concerns: Fresh insights from wavelet multiscale analysis," Finance Research Letters, Elsevier, vol. 55(PA).

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    More about this item

    Keywords

    Climate Risk; Carbon Prices; Stochastic Volatility;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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