Climate change risks and the clean energy-oil-technology prices nexus

Abstract

We posit that climate risk is a plausible determinant of clean energy prices. Using a recent novel climate-related investor sentiment excerpted by search (CRISES) data set, we construct several daily physical and transition climate risk indexes between October 13, 2010, and June 24, 2022. We use our risk indexes to assess the clean energy-climate hypothesis by testing which type of climate risk is priced and which type is causing disruptions (in the form of price reversal and excess volatility) across all clean energy subsectors at the aggregate market level. We find that certain types of risks are consistently positively priced across clean energy sub-sectors. Notably, we find that OCEANS and ECOSYSTEM risks (among the physical climate risks) and climate SOLUTIONS risks (among the transition climate risks) are positively priced across clean energy assets. Other types of risks are sources of noise trading in the clean energy market. More specifically, among all physical and transition climate risks, we find that CARBON, SOCIETY, PLEDGES, and CONVENTIONS risks generate noise trading behavior that impact both the level and volatility of several clean energy industries. The most disrupted clean industries are the fuel cell, advanced material, and energy management industries. In conclusion, we find that climate risks do impact clean energy returns. However, unlike the direct consistent impacts of the price of oil and technology stock prices on clean energy prices, the impacts of climate risks on clean energy prices vary directly and indirectly according to (1) The type of climate risk, and (2) The degree of investor confidence in the ability of the clean industry to combat climate change.