Working Paper

Do Markets Trump Politics? Fossil Fuel Market Reactions to the Paris Agreement and the US Election

Oct 18, 2018 | Samson Mukanjari, Thomas Sterner

Summary

We show the Paris Agreement and Trump election have only moderate effects on the market value of fossil fuel firms.

Key Findings

  • We show that the Paris Agreement and the election of President Trump only had moderate effects on firm values.
  • We find larger effects for the renewable sector stocks but the concern for stranded assets in coal is not confirmed.
  • We show that the impulse-indicator saturation method is a good complement to event studies.
  • One interpretation is that the most important factors are underlying long-run trends rather than political events.

Abstract

How can event studies in financial markets best be used to evaluate policy? We take the example of climate policy and the issue of whether world climate policy is effective. Environmentalists claim too little is done. Industry argues policy is too interventionist and warns that stranding significant assets could lead to financial instability. We evaluate the impact of global climate policymaking by studying the impact of the election of President Trump and of the Paris climate agreement on the stock market value of energy sector firms. Using event study and impulse-indicator saturation methods, we show that both events had only moderate effects on the value of fossil fuel firms.