Does the European low-carbon policy impact price uncertainty in fossil energy markets?

Abstract

This paper aims to assess the potential effects of a low-carbon policy on price uncertainty in fossil energy markets. For this purpose, we propose text-as-data methods that rely on unsupervised machine-learning algorithms applied to European Union (EU) laws and newspapers. These methods are used to construct two monthly indices over the reference period 1997-2021: (i) a news-based index that reflects uncertainty about the regulatory framework of low-carbon policy as relayed in the press, and (ii) a law-based index that reflects structural changes in European low-carbon policy. Given the support for the carbon phase-out policy, we further examine the extent to which each index relates to price uncertainty dynamics in fossil energy markets. As a result, we find that an increase in the news-based index leads to a positive short-run effect on price uncertainty. Similarly, we observe both dampening short-run and persistent effects of the law-based index on price uncertainty. Thus, stabilizing price uncertainty dynamics through regulations serves as a measure of the efficacy and resilience of European low-carbon policy. This result is robust to the consideration of macroeconomic factors.