On measuring climate risks using attention search and testing the clean energy-climate hypothesis

Abstract

ABSTRACT We measure physical and regulatory climate risks as innovations in several attention to climate change indexes that we construct using search volume data in Google Trends. The intention is to use the constructed risk indexes to test the empirical validity of the clean energy-climate hypothesis, which posits that clean energy prices fall (rise) following a drop (rise) in attention to climate risks. We test the empirical validity of this hypothesis at the macro (market level) using regime switching models and at the micro (firm level) using time-series regressions across clean energy sub-sectors. The macro analysis reveals that our hypothesis is only valid for climate pledges and physical climate risks. When attention to climate pledges drops or when physical climate risks are low, investors become reluctant to hold clean energy assets and vice-versa. Climate policy and climate solution risks have no impact on the nonlinear dynamic behaviour of clean energy prices. These results mean that investors and the public believe that climate policies lack credibility and climate solutions are not effective. The firm-level analysis confirms the findings of the macro analysis and reveals the heterogeneity of climate risks across clean energy sub-sectors.