Climate policy volatility hinders renewable energy consumption: Evidence from yardstick competition theory

Researchers have a high affirmative agreement on climate change and the need for policies to stimulate renewable energy consumption. However, there is little consensus among policymakers who are supposed to implement the solutions researchers propose. This phenomenon has led to extensive research on the effects of climate policy uncertainty (CPU) on energy consumption. We develop a yardstick competition model to examine the effect of climate policy volatility (CPV) on primary energy consumption in the U.S. residential sector. Our approach employs a Dirichlet process mixture linear model (DPM-LM) to account for unobserved heterogeneity and excess kurtosis. The results revealed that all three CPV estimators (Garman-Klass, Parkinson, and Rogers-Satchell) adversely affected the demand for hydrocarbon gas liquids (HGL) and biomass energy. In contrast, they positively affected the consumption of natural gas. The control variables (price and GDP) were consistent with the a priori expectations. This paper concludes that CPV creates a disincentive to increasing renewable energy demand. It is, therefore, critical for policymakers to consider ways of stabilizing climate policy and arriving at specific, measurable, achievable, realistic and definite time-bound goals and policies. It is equally important for policymakers to use science-based ex-post measures to inform the climate policy debate.