Exploring the unpredictable nature of climate policy uncertainty: An empirical analysis of its impact on commodity futures returns in the United States

Abstract

This study offers a nuanced examination of the interplay between climate policy uncertainty (CPU) and three categories of the US commodity futures returns (metals, energy, and soft commodities). By integrating a regression framework with a Markov regime-switching approach, our results uncover both linear and nonlinear effects of CPU in varying volatility contexts. This comprehensive methodological approach sheds light on CPU's diverse impacts across various types of commodity futures. The findings illustrate CPU's notable influence on metal and energy futures in low-volatility regime, contrasted with its more pronounced effect on soft commodities during high-volatility regime. These insights are pivotal for investors strategizing in light of CPU, and underscore the significance of renewable energy in alleviating climate policy uncertainties within commodity markets.