The Price of Policy: Analysing Stock Market Responses to Conflicting Environmental Executive Orders in Sectors Key to the Energy Transition

Abstract

In recent decades, the climate crisis has become increasingly relevant in global policy. The environmental decisions made by governments, particularly those of high emitting countries like the United States, have played an important role in the formation of the global energy transition. These policy changes have a direct impact on financial markets, and it is essential that firms in each industry adapt to necessary environmental changes. This thesis aims to investigate the sector-based market responses to both regulatory and deregulatory environmental executive orders, through the lenses of President Trump’s 2017 E.O. 13783, “Promoting Energy Independence and Economic Growth” and President Biden’s 2021 E.O. 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis”. The financial impacts of these executive orders will be studied through a differences-in-differences analysis in the sectors of Finance, Transportation, Industrials, Energy, Utilities, Mining and Renewables due to the importance of change and development in each sector for a successful energy transition. The analysis examines the presence of abnormal returns within a five-day event window surrounding the issuance of each E.O. and controls for firm-level fixed effects. The results show that the deregulatory E.O. 13783 positively impacts stock pricing in the Energy and Industrials sectors but produces negative abnormal returns in the Finance industry. They also reveal that the regulatory E.O. 13990 negatively impacts stock pricing in all sectors included in the study with the exception of Industrials. These results are a combination of the explicit areas that each E.O. targets and investor behaviour regarding policy uncertainty. The presence of abnormal returns provides investors and policymakers with important information to make economically informed bipartisan environmental policy decisions which are essential for a successful energy transition.