Can energy-related uncertainty serve as a barometer for carbon pricing?

Abstract

This investigation examines the reciprocal connection between energy-related uncertainty (EUI) and carbon trading prices (CTP). Empirical results indicate that EUI can positively affect CTP. This positive impact confirms that high EUI prompts businesses to increase demand for carbon emissions permits to cope with energy market risks, ultimately driving up CTP. The intertemporal capital asset pricing framework explains the findings. Conversely, the relationship between EUI and CTP is beneficial and detrimental, demonstrating that ongoing carbon market development contributes to energy market stabilisation and lowers EUI. However, disputes over energy supply and demand can undermine this effect. Within sustainable development, these findings contribute to governments employing EUI to indicate the effectiveness of carbon pricing policies, thereby better addressing energy market risks. Simultaneously, businesses can regard EUI as a signal to anticipate future carbon pricing changes and take corresponding risk management measures.