Commodity futures market conditions and climate policy risk: Evidence from energy and metals markets

Kingsley E. Dogah, Yingying Wu*, Lavinia Rognone

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

This study investigates the impact of climate policy uncertainty (CPU) on energy and metal commodity futures markets by employing quantile regression, which accounts for various (bearish, normal, and bullish) markets. Our results reveal that the impact of CPU shocks is heterogeneous and market condition-specific. Particularly, CPU exerts a significantly negative effect on all commodities, except natural gas, in a bearish market. Under a normal market, the impact of CPU on energy returns varies across commodities whereas for a bullish market, the CPU effect is mixed. The results also reveal natural gas to be a good hedge instrument for climate policy risk. We further conducted channel analysis using the theory of storage and hedging pressure hypothesis. The key finding reveals inventory level as the transmission channel of climate policy risk. Our findings have implications for the inventory management strategies of producers and suggest that regulators should consider market-based policies in their decarbonization efforts.

Original languageEnglish
Pages (from-to)1694-1709
Number of pages16
JournalJournal of futures markets
Volume44
Issue number10
Early online date23 Jul 2024
DOIs
Publication statusPublished - Oct 2024

Keywords / Materials (for Non-textual outputs)

  • commodity futures
  • climate policy risk
  • energy
  • metals
  • quantile-channel analysis

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