Description:
The energy sector has to transform itself to adapt in the wake of climate change and increasing emissions from greenhouse gases (GHGs). Energy prices have risen dramatically in recent months due to a number of factors, including demand from emerging economies, geopolitical tensions in countries like Russia and Iran, and efforts by some countries to phase out fossil fuels. The high energy cost affects the prices of food, transportation, and other necessities that people rely on for the day-to-day living. Meanwhile, climate change is causing the planet to heat up increasingly rapidly. As a result, extreme weather events like droughts and hurricanes will only get worse over time. These two issues are connected in more ways than you might think. This study examines the asymmetric spill overs from uncertainty arising out of climate risk and carbon emissions on the prices of key energy markets (natural gas, electricity, coal, oil, diesel) by using the time- and frequency-domain of Diebold and Yilmaz (2014) and Baruník and Kˇrehlík (2018) by using the monthly and daily frequency of climate policy uncertainty (CPU) and carbon emissions (CO) respectively. Our findings indicate that overall connectedness based on the BK framework is highest for 3-6 months for CO and energy prices, with a magnitude of 39.01%. For CPU based model, the overall connectedness increases with time, with the lowest magnitude reported for 1 month (33.84%) and the highest for 6 months and beyond (47.91%). CPU is a net transmitter to the energy prices for 1-3 months, whereas, in the case of CO, the net transmission differs for different months. For e.g., CO is a net transmission for natural gas (NG) for 1 month and 1-3 months, and for 3-6 months, CO becomes a net transmitter for WTI crude (WTI) and Brent Oil (BRENT). Results of frequency-based Granger causality show CPU Granger causes NG, WTI, and BRENT for all the frequencies, whereas CO Granger causes NG, WTI, BRENT, and ULS diesel (ULSD) for all the frequencies. Our findings have implications for policymakers and energy importers as they should differentiate their short- and long-term policies and purchase contracts. For example, in the longer-term, they should take care of the impact of climate change and emissions on energy demand