Institutional enforcement of environmental fiscal stance and energy stock markets performance: Evaluating for returns and risk among connected markets

Abstract

Energy markets are critical avenues for achieving the goal of climate action. Nevertheless, effective green policies by the government may significantly influence the demand and supply side of the market differently. Using the time-varying parameter vector autoregression (TVP-VAR) and panel autoregressive distributed lag (PARDL), this study examines the role of institutional enforcement of environmental taxes and government spending on environmental protection on the returns and risk connectedness of energy stocks of 12 countries. The results show that networks of energy stocks primarily influence the returns and risk of each country's energy stock. The analysis further reveals that institutional enforcement of environmental fiscal laws reduces the long-run total returns connectedness of the energy market only through the net transmitting markets. The opposite is observed in net receiving markets. On the other hand, the risk spillover of energy markets increases with enforcing environmental protection spending only through the net receiving markets in the long run. A detailed analysis of the net receiving markets demonstrates that, depending on the period and the instruments employed, the impact of enforcing environmental fiscal laws on risk spillover of these markets is heterogeneous. The results of this study emphasize the policy implications for investors and climate change.