Russo, Carmine (2025) Four Essays on Climate Finance and Economics. [Tesi di dottorato]

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Abstract

This dissertation examines the complex interplay between climate risks, financial markets, and policy responses through four interconnected studies. The first explores how climate risk awareness impacts cryptocurrency markets. Using Google search data for ``climate change'' as a proxy for climate risk salience, it shows that, when public attention towards climate risk increases, so do the returns of the largest 27 cryptocurrencies. With an event studies setting, centered around United Nations Climate Change Conferences (COPs), the analysis demonstrates that heightened attention to climate risks corresponds with increased returns for major cryptocurrencies. These findings suggest that investors view cryptocurrencies as alternative investment instruments during periods of climate-related uncertainty, despite their significant environmental externalities. The second study investigates the effects of physical and transition climate risks on European equity and options markets. It identifies a significant transition risk premium in equity markets and heightened left-tail implied volatility in options markets, reflecting increased downside protection costs. In contrast, physical risks show limited market impact, likely due to their unpredictability and mitigating factors such as insurance and government interventions. The findings emphasize the distinct market pricing mechanisms for these two dimensions of climate risk. The third paper addresses Europe’s climate investment gap by proposing the issuance of European climate bonds. Funded through revenues from an expanded European Emissions Trading System (EU ETS) these bonds would support climate adaptation and mitigation projects contingent on countries' performance on the implementation of climate projects. The proposed framework enhances climate investment while offering a safe, liquid, and green asset, contributing to portfolio greening, increased resilience to sovereign crises, and alignment of monetary policy with climate objectives. Finally, the fourth study examines the economic effects of stricter EU climate policies on international trade, focusing on the transition from grandfathering to auctioning under phase III of the EU ETS. Using a difference-in-differences approach and trade data from Italian firms, the study finds no evidence of regulatory cost pass-through in trade prices. Instead, the policy change is linked to increased difference among treated and control firms in the probability of importing, from intra- and extra-EU ETS countries, and exporting to extra-EU ETS countries, suggesting evidence of offshoring (or outsourcing) behaviour.

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