Study shows how investments reflected shift in environmental views

Dr. Anastasia Shcherbakova, clinical assistant professor of finance and managerial economics in the Naveen Jindal School of Management, said the researchers used the 2011 Fukushima crisis in Japan as a natural experiment to evaluate responses of U.S. and European investors to a shifting view of nuclear power.

This study, published in a recent issue of the Journal of Environmental Economics and Management, is the first to use financial investors' actions, rather than self-reported opinions, to investigate the trans-Atlantic difference in public opinion on climate change and the environment.

"This earthquake was something that was not foreseen by anybody, but it managed to change the way that people thought about nuclear power rather dramatically," said Shcherbakova, who also serves as director of the Master of Science in Energy Management program at UT Dallas.

In the aftermath of the earthquake and subsequent tsunami and nuclear disaster, there was worldwide pessimism about nuclear energy, Shcherbakova said. Many countries took their nuclear power plants offline for safety inspections, and some countries announced they were getting out of nuclear power.

"The global population is growing, which means we are going to require more energy," Shcherbakova said. "When governments start shedding nuclear generation capacity, we are going to need other energy sources to fill the gap."

The study examined the behavior of investors in U.S. and European financial markets that reflected their perceptions about future profitability of fossil fuels and renewable energy. This profitability assessment is based on the perceived potential of these fuel types to substitute for nuclear generation, should it become scarcer in the aftermath of the Fukushima crisis.

The researchers used 2010-2011 stock market data from the Center for Research in Security Prices, the New York Stock Exchange and the Bloomberg database.

Results show that investment behavior reflects investors' environmental perceptions. The researchers observed a significant increase in returns to coal in the U.S., implying that investors put more money into coal stocks, Shcherbakova said. This suggests that they perceived cost efficiency and reliability of energy supply to be more pertinent issues than climate change.

In Europe, investors put significantly more money into renewable energy stocks, suggesting that they reflect the region's environmentally conscious attitudes and willingness to pay for environmental outcomes, relative to investors in U.S. markets, Shcherbakova said.

"In the U.S., there is a very long history of coal," she said. "If you want a cheap and reliable source of energy, you just run your coal plant all day long. In Europe, there's been a significant backlash against coal. People like their countryside and are much more nature-oriented.

"In Europe, people have been much more willing to embrace renewable energy even though it's much more expensive. In the U.S., we observe a much more price-sensitive energy consumer."

Shcherbakova said one implication of the findings is that financial markets can be important contributors to successes and failures of government policy.

For example, if the government said that by 2025, 25 percent of the country's energy must come from renewable resources, it would be difficult to achieve that goal if the policy isn't aligned with the reality of economics, she said.