Energy transition, financial markets and new EU interventionism

On 13 February 2024, the European Studies Centre (ESC) hosted Federica Genovese, Professor of Political Science and International Relations at the Department of Politics and International Relations, University of Oxford and Thomas Hale, Professor in Public Policy (Global Public Policy) at the Blavatnik School of Government, University of Oxford. Genovese presented a recent paper she has co-authored that examines the effect of EU policy intervention through sanctions and green industrial policy on investor decision and the revenues of green and brown energy companies. Hale discussed the paper and its findings, while Tim Vlandis, Associate Professor of Comparative Public Policy at the Department of Social Policy and Intervention, University of Oxford, chaired the seminar.

The paper focuses on the implications of EU interventionism on energy companies in Europe, but flows from broader questions on the challenges to mobilise capital for energy transition and decarbonisation and to get private investors to finance the energy transition. Starting from these broader concerns, the paper seeks to assess how markets and investors react to EU signals and interventions.

Since the Barroso Commission the EU outlined its vision to be a global champion to tackle greenhouse gases and implement climate neutral policy. EU climate policy in the early 2000s relied heavily on market mechanisms (e.g. the 2005 emission trading scheme and the 20-20-20 package). Genovese argued that while these measures entailed approving market-oriented regulatory packages, the climate policy approach taken by the Von der Leyen Commission, with the Green Deal at the centre, has been different. The Commission has been testing out across a broad range of policy areas the previously discredited ‘interventionist’ (state-led) approach, which started with the Covid-19 pandemic response and, more prominently, after the Ukrainian crisis through, for example, REPoweEU, CBAM (Carbon Border Adjustment Mechanism).The paper explores market reactions to the EU’s new interventionism through an event analysis of the short-term financial returns of fossil fuel and renewable energy companies in 2022 by using evidence from daily data of the stock value of 636 energy companies – both EU and non-EU – to study market returns.

The paper argues that the EU’s ‘state-action’ announcements are credible especially at the onset of a new wave of uncertainty; meaningful energy-relevant interventions can be both direct (climate-specific) or indirect (geopolitical, supply chain related), though the direct ones will have stronger distributional implications for the energy transition; and climate-relevant interventions can give a market premium to domestic green companies, but in ambiguity fossil fuel companies do just fine.

The authors of the paper first set out hypotheses related to the EU’s green industrial policy (direct intervention). Accordingly, they expected that (1) direct green industrial policy will benefit to a greater extent renewable energy firms than fossil-fuel intensive firms and (2) renewable energy firms in Europe will benefit to a greater extent than renewable energy firms outside of Europe. They further hypothesised in relation to indirect interventions (sanctions towards Russia) by claiming that (1) renewable energy firms will benefit more than fossil-fuel intensive firms from indirect energy interventions, although the gap between the two types of firms will be smaller and (2) a greater effect is expected for energy firms in Europe than for firms outside of Europe.

The paper found that climate policy interventions generate the biggest distributional effects with positive returns for green companies and negative returns for brown companies, whilst sanctions have similar effects for both green and brown companies. Additionally, EU green companies benefit more from both types of interventions than foreign green companies but only during the Spring of 2022.

Genovese also highlighted that when the messaging about climate was direct, the distribution effects in the markets were the ones expected, but the fossil fuel markets were not hurting overall.

Hale praised the paper for addressing the issue of state credibility and its implications for green industrial policy, and its relevance for future research the assessment of climate change policies and net-zero targets. He further outlined three key points of discussion concerning the paper’s methodology and data interpretation. First, he underscored that different type of interventions have different implications for different kinds of fossil fuel companies and different kinds of energy companies. There are, for example, companies that have both green and brown assets, which have been invested in building renewable energy, but have also ‘legacy’ assets. Second, he appreciated event history studies that use market valuation because they provide granular details on the impact of a particular event in time on market behaviour, but he cautioned that markets give confusing signals, and thus prudence is required. Third, he noted that although the sanctions against Russia were being issued by the EU, they were also being coordinated within the G7 countries. So signals towards markets on sanctions come from a different set of countries than those responsible for the green industrial policy. This puts into question whether markets have been reacting to EU credibility or to that of the broader Western opposition towards Russia.

The discussion further expanded on topics and challenges outlined in the paper. It included questions on methodology, the power of EU institutions, energy market behaviour after the approval of the US’s Inflation Reduction Act, and the costs of energy transition.

by Alban Dafa (ESC Research Assistant)