The dynamic relationships between carbon prices and policy uncertainties

Abstract

Using the generalized impulse response analysis, this study examines the nexus between the prices of crude oil, natural gas, and carbon emissions allowances in the EU carbon emissions trading system (CETS) and climate policy uncertainty (CPU) and global economic policy uncertainty (EPU). Additionally, we employ bootstrap rolling-window Granger causality tests to investigate the relationship between carbon price in China's national CETS and the US-specific EPU (USEPU). The results show that rising carbon and gas prices positively impact CPU, while a positive shift in oil price increases (decreases) the prices of carbon and gas (EPU). Furthermore, an increase in the CPU (EPU) positively impacts the gas price (increases the CPU but decreases the prices of carbon and oil). Finally, we find evidence of time-varied bi-directional causality between China's CETS and the USEPU. The above findings offer important implications for portfolio managers and policymakers.