Do Markets Trump Politics? Evidence from FossilMarket Reactions to the Paris Agreement and the US

Election

Samson Mukanjari and Thomas Sterner

University of Gothenburg

envecon 2017: Applied Environmental Economics ConferenceThe Royal Society, London

3 March 2017

1 / 15

Introduction I

Media focuses public attention on high-profile events e.g. politicalelections and international negotiations.

Effect somewhat exeggerated compared to effects of gradual butfundamental shifts in technology and preferences.

The year 2016 brought mixed fortunes for the climate.

Evaluate importance of such events using analytical techniques.

4 / 15

Introduction II

Climate change is a global externality requiring global coordination.

Actions of any individual country not enough.

The Paris climate agreement is one step towards global coordinationof emissions reduction.

Keep warming well below 2◦C above pre-industrial levels and to pursueefforts to limit temperature increases even further to 1.5◦C.

But how do we judge the likely ‘success’ of such an agreement?

Analyse reaction of energy sector firms to the Paris agreementannouncement.

In the presence of the agreement, not all fossil reserves will beexhausted.Fossil reserves are assets on the firm’s balance sheets!Paris agreement should negatively affect fossil firm’s value.

We also consider a range of climate-relevant global political events.

5 / 15

Methodology

I. Event Study ApproachDistinguishes between:

1 Normal return – price change expected in the absence of the event.2 Abnormal return – price change as a result of the event.

Abnormal return → difference between actual return in event windowand normal return in the estimation window.

Figure 1: The Event Study Timeline

II. Impulse Indicator Saturation (IIS)

Search for structural breaks in dependent variable.7 / 15

Sample Selection and Data Description

Daily stock and market returns data from January 2015 collectedfrom Bloomberg database =⇒ sampling interval set to one day.

Inclusion criterion:

1 Listed in one of the major markets.

2 Continuously traded over the sample period and have not filed forbankruptcy during this period.

50 globally listed coal companies across 13 stock markets:

National Stock Exchange (SE) of India, NYSE, NASDAQ, ShanghaiSE, Hong Kong SE and Johannesburg SE, Australia, Indonesia, Japan,Philippines, Poland, Thailand and UK.Constituents of major coal indexes and exchange-traded funds (ETFs)namely Dow Jones US Coal Index (DJUSCL), Stowe Global Coal Index(COAL) and VanEck Vectors Coal ETF (KOL).

Equity based exchange-traded funds (ETFs).

8 / 15

Event Timeline

Table 1: Timeline of Paris Agreement

Date Event1992 UNFCCC established at Rio Earth Summit2009 COP 15 Copenhagen12 December 2014 COP 20 in Lima ends31 March 2015 Countries start submitting INDCs01 October 2015 Deadline for submitting INDCs30 November 2015 Climate negotiation start in Paris12 December 2015 Agreement reached by 195 countries22 April 2016 Paris Agreement opened for signature on Earth Day22 April 2016 15 countries submit their instruments of ratification03 September 2016 US and China ratify21 September 2016 55 countries ratify the agreement (first threshold passed)02 October 2016 India ratifies05 October 2016 EU ratifies (second threshold passed)04 November 2016 Agreement enters into force08 November 2016 COP 22 begins in Marrakech09 November 2016 US presidential results announced

9 / 15

Event Study Results

Figure 2: Paris climate agreement announcement cumulative abnormal returns for renewableand non-renewable energy using Exchange Traded Funds.

10 / 15

Table 2: Paris climate agreement announcement cumulative abnormal returns forrenewable and non-renewable energy using Exchange Traded Funds.

AlternativeCoal Oil Solar Energy

CAR0,1 -0.019 -0.015∗∗ 0.070∗∗ 0.017

CAR0,2 -0.004 -0.013 0.128∗∗ 0.042∗

CAR-1,0 -0.031 -0.005 0.038 0.009

CAR-2,0 -0.042 -0.008 0.037 -0.001

CAR-1,1 -0.035 -0.013 0.064 0.017

CAR-2,2 -0.031 -0.013 0.121 0.033

CAR0,5 0.027 -0.020 0.200 0.071

CAR-5,5 -0.040 -0.020 0.191 0.058

CAR-10,5 -0.053 -0.006 0.259 0.074

N 1 4 2 7∗p < 0.10, ∗∗p < 0.05, ∗∗∗p < 0.01 denote significance at 10%, 5% and 1% respectively.

11 / 15

Table 3: Output from impulse indicator saturation to detect relevant climate-related politicaland market events between January 2015 and 2017.

I II III IV V VI

Market Returns 0.325∗∗∗ 0.309∗∗∗ 0.312∗∗∗ 0.319∗∗∗ 0.300∗∗∗ 0.307∗∗∗

Paris 0.067∗∗∗ 0.066∗∗∗ 0.067∗∗∗ 0.066∗∗∗ 0.067∗∗∗ 0.066∗∗∗

US Election -0.062∗∗∗ -0.064∗∗∗ -0.061∗∗∗ -0.064∗∗∗ -0.061∗∗∗ -0.064∗∗∗

rsc(t−1) 0.169∗∗∗ 0.142∗∗∗ 0.142∗∗∗

04 March 2015 0.065∗∗∗ 0.060∗∗∗ 0.065∗∗∗ 0.060∗∗∗

05 March 2015 0.073∗∗∗ 0.064∗∗∗ 0.074∗∗∗ 0.064∗∗∗

20 May 2015 -0.063∗∗∗ -0.064∗∗∗ -0.063∗∗∗ -0.064∗∗∗

19 June 2015 -0.060∗∗∗ -0.062∗∗∗ -0.060∗∗∗ -0.062∗∗∗

16 December 2015 0.059∗∗∗ 0.060∗∗∗

22 December 2015 -0.058∗∗∗ -0.058∗∗∗

constant -0.001 -0.001 -0.001∗∗∗ -0.001 -0.001 -0.001∗p < 0.10, ∗∗p < 0.05, ∗∗∗p < 0.01 denote significance at 10%, 5% and 1% respectively.

IIS Results

Figure 3: Impulse indicator saturation (IIS) detected climate-related political and marketevents between January 2015 and 2017.

Six additional dates identified by IIS:04 March; 05 March; 20 May; 19 June; 16 December; and 22 December 2015.

All associated with significant events in fossil and renewable energy markets.13 / 15

Learning from the data

IIS identifies a number of dates, when our simple index of climatecompatibility picks up significant impacts.

Positive impacts on 4 and 5 March 2015 as well as 16 December 2015.Negative impacts on 20 May, 19 June and 22 December 2015 i.e. goodfor coal and/or bad for renewables.

Note the absence of dates otherwise considered to be significantclimate-related events.

Search relevant news telegrams from Retriever using the search words‘climate’, ‘renewables’, ‘coal’and ‘solar’.

(+) 4 and 5 March 2015 – China’s government releases plans forfurther restricting its consumption of coal.(−) 20 May 2015 – President Hollande gave an important speech atUNESCO.(−) 19 June 2015 – Several pieces of bad news for wind power in theUK, with large protests against investments and, simultaneously, newsof important reductions in UK subsidies.

14 / 15

Discussion

Limited market response to Paris agreement and other climate-relatedpolitical events.

Two key words matter here:

1 Surprising2 Strong

Only when both these words apply simultaneously that we expect astrong reaction in energy markets.

Surprise alone is not sufficient – Agreement needs to be strong, i.e. itshould provide solutions for anthropogenic climate change.

Current commitments in the INDCs not consistent with temperatureincreases below 2◦C.

Lack of stronger reaction might be due to anticipation or lack ofcredibility.

Major events have somewhat less importance than generally believedin the media.

15 / 15