How does climate policy uncertainty affect financial markets? Evidence from Europe

Abstract

This study analyzes the time-varying effect of climate policy uncertainty (CPU) on the stock market and clean energy indices in the European context. For this purpose, we use the Bayesian time-varying parameter VAR model. The empirical results show that CPU shocks have a significant effect on the financial indexes. Returns on clean energy (crude oil) stocks increase (decrease) in response to heightened climate risk. Moreover, the COVID-19 pandemic is a relevant tipping point in CPU dynamics. These results offer important implications for European investors and policymakers in the context of the European climate-energy crisis.