The wealth effect of the US net zero announcement

This study investigates the impact of announcements relating to climate change mitigation in the US on the Energy Select Sector ETF (XLE), starting with the US president's net zero emissions announcement on 22 April 2021. We use options market data, in addition to ETF market data, to disaggregate the news effect and value effect of the announcement, finding a positive news effect ($1.65 billion) but a negative value effect (−$2.02 billion). The novel approach proposed by Barraclough et al. (2013) is adopted to identify traders' perceived probability of the achievement of net zero emissions as perceived by investors, finding that investors assigned a 30.9 % probability. Given the difficult journey of the passage of the net zero bill through Congress, we also examine the investors' perceived probability of achievement of later initiatives, as well as their news and value effects. Estimation around the introduction of the Inflation Reduction Act (IRA) in Congress on 27 October 2021 shows a positive news effect ($824.61 million) and an almost analogous, negative value effect (−$2.32 billion). The news effect is a result of the signal to the market that reduces policy uncertainty and enables fossil fuel firms to plan with greater certainty the transition to clean energy and the value effect comes from the fact that some reserves may not be able to be extracted and some assets will be stranded. This study finds if the net zero emissions announcement is successfully enacted as legislation, the value of XLE would be 96.90 % of its current value while a failure to become legislation leads to a rise in the value of XLE to reach 106.90 % of its current value.