Are economic policy uncertainty and carbon futures price interacting? Evidence from the European Union

Abstract

This paper investigates the dynamic interplay between economic policy uncertainty and the carbon futures market within the context of global low-carbon development. The study utilizes a comprehensive dataset spanning 2005 to 2023, including daily observations of economic policy uncertainty (EPU) and carbon future prices (EUAP) in the European Union. Bootstrap subsample rolling window Granger causality tests are employed to examine the interrelationship between EPU and EUAP, providing robust and time-varying causal insights. The findings reveal the adverse impact of EPU on EUAP, highlighting that the volatility associated with economic policy uncertainty can serve as a predictive factor for carbon future prices. On the other hand, the EUAP exhibits a negative influence on the uncertainty of economic policy, indicating that the economic situation in Europe can be observed through the carbon future market. The findings presented in this study are in line with the underlying theoretical model of policy uncertainty and future prices. Considering the complex economic environment and the influence exerted by COVID-19, exploring the link between EPU and EUAP is crucial for informing investors’ decision-making and guiding the development of policy to enhance carbon market efficiency and promote a low-carbon economy.

Keywords

• Carbon future price
• Economic policy uncertainty
• Causal relationship
• Time varying