Climate related political events can provide insights for policy makers

The Paris Agreement in 2015 had a positive impact on the stock market value of renewable energy firms and a negative impact on fossil fuel firms. But the year after, the election of Trump as US president led to the opposite. New research from the University of Gothenburg shows how the reaction of financial markets to large climate related political events can provide useful insights for policy makers.

“When the Paris climate agreement was adopted, there were several reports in the media about significant decreases in coal stock prices as a result. Climate activists such as Greenpeace International celebrated the agreement as ‘signaling the start of the end of the fossil fuel era’. A year later, the unexpected happened: Donald Trump won the US election, and he stood for the opposite as far as climate policy is concerned”, says Samson Mukanjari, researcher in economics at the School of Business, Economics and Law, University of Gothenburg.

Wanted to investigate how the financial markets reacted

He wanted to investigate more specifically how the financial markets – renewable energy and fossil fuels stocks and futures markets – reacted to both political events to get insights on the types of climate policies
portrait samson mukanjari that the Trump administration was anticipated to implement and the ambitiousness of current climate policies, and wrote his PhD thesis on the subject.

“Using the event study approach, I find that the Paris Agreement had a positive impact on the stock market value of renewable energy firms and a negative impact on fossil fuel firms.”

The election of Trump had a reverse effect

For example, the cumulative abnormal returns for coal stocks globally were about -8 percent over the 13 trading days, which includes the start of the Paris negotiations in 2015, announcement day and two days post-announcement. Cumulative abnormal returns for natural gas stocks were much larger, -16 percent.

In 2016, the election of Donald Trump as US president had a reverse effect on energy stock prices.

“The US election negatively affected the stock market value of renewable energy firms and led to increased profit expectations among fossil fuel firms. The effect on the value of fossil fuel firms is greatest for US based firms while the results for coal companies operating in other countries is mixed.”

Company went up by 50 percent on Election Day

On the Election Day, Samson Mukanjari find cumulative abnormal returns of about 11 percent for US coal stocks. For some individual companies, the impact was even bigger. Peabody Energy Corp. under bankruptcy protection at the time saw its stock price go up by 50 percent on Election Day.

However, when Samson Mukanjari analyze coal and natural gas futures prices over the 21-day post-election period, he observes cumulative abnormal returns of up to -27 percent for coal and 19 percent for natural gas.

“This suggests Trump was primarily anticipated to implement policies that would boost coal supply while having the opposite effect for natural gas.”

Which of these two political events have had the biggest impact on the financial markets?

“Using carefully designed methods that detect and control for structural breaks and outliers, I find that both the Paris Agreement and the US election are equally important among a set of other things. I conclude that the Paris Agreement, the US election, and some other major policy announcements did have both a substantial and statistically significant effect on the relevant financial markets. This suggests that there is enough sensitivity to say clearly that climate policy matters, but so far, the policies have not come close to causing disruptive changes as feared in the debate about stranded assets.”

Samson Mukanjari defended his thesis Climate Policy and Financial Markets on 28 January 2020.

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