Towards a Low-Carbon Economy: Does the European Energy and Environment Policy affect fossil energy markets?

Proceedings of The 3rd World Conference on Climate Change and Global Warming

Year: 2023

DOI:

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Towards a Low-Carbon Economy: Does the European Energy and Environment Policy affect fossil energy markets?

Jacques Minlend

ABSTRACT: 

This paper proposes text-as-data methods relying on unsupervised machine learning algorithms applied to European Union (EU) law acts and newspapers. The latter are used to construct two monthly indices over a reference period 1997-2021: (i) First, a laws-based index which reflects structural changes of the European energy and environment regulations (EnvP). (ii) Second, a news-based index which underlies conjunctural uncertainty about the international context in which the global energy and environment policy evolves (EnvPU). The main findings suggest both indices display, in some extent, a common evolutionary pattern around salient events in the history of the EU energy and environment policy. Moreover, EnvPU index appears to be more volatile and is driven in the short-run by EnvP index. Given the support of such a policy to carbon phase-out, I further examine, in what extent, each index relates to price uncertainty dynamics in fossil energy markets. As a result, I uncover that, while an exogenous shock in laws-based EnvP index has a negative effect on price uncertainty in oil and gas markets, it tends to increase the coal price uncertainty. Conversely, increase in news-based EnvPU index has a positive impact on all fossil energy price uncertainty, the effect being stronger and more significant for gas and coal markets. Overall, EnvP index depicts a stabilizing effect on fossil energy prices.

keywords: Energy and Environment Policy, News and media, Text-mining; Unsupervised machine learning, Commodity markets, Structural VAR