The effect of climate policy uncertainty and induced risks on US aggregate and sectoral stock returns

Abstract

This study examines the change in climate policy uncertainty ($∆$CPU) on U.S. stock returns. Evidence shows $\mathrm{that}∆$CPU and its lagged value present a positive effect in energy (and sometimes the utility) sector; however, there is a negative effect that exhibits in aggregate and other sectoral stock returns as investors discount the future income streams, costs of carbon and damages on the valuation of stocks. The $∆$CPU on stock return and volatility further generate adverse effects on stock returns. Similarly, uncertainties from energy and environmental policy change, geopolitical risk, financial crises and COVID-19 negatively affect stock returns.