How the supply and demand of steam coal affect the investment in clean energy industry? Evidence from China

Abstract

Investment of clean energy industry aims at developing clean alternative energy sources to substitute fossil fuels, the consumption of which leads to climate change and air pollution. However, how the supply and demand of steam coal affect the investment remains an extremely understudied issue, as the extant research focuses on crude oil, while steam coal satisfies most of the energy demand in emerging economies like China. This study empirically investigates the time-varying co-movements between steam coal prices and clean energy stock indices in China at the sectoral level; the former denotes the supply and demand, and the latter represents the investment. Five clean energy sectors are considered, including geothermal power, hydrogen power, nuclear power, solar power and wind power. The studied period is from Jan 2, 2008 to Feb 28, 2019. The analysis is carried out using a VAR-DCC-GARCH framework. The empirical findings indicate the presence of significant bi-directional volatility spillover between the steam coal market and the clean energy stocks. We further portray and explain the dynamic conditional correlation among steam coal prices, clean energy sectoral indices and an environmental under the fluctuating China's stock markets. Based on the empirical evidence, we provide policy implications to facilitate the development of the clean energy industry.