Climate policy uncertainty, electricity production and credit risk: do banks enhance green investments?

Credit risk in the banking sector is crucial in the current discussions on climate change and environmental sustainability. The transition from non-renewable to renewable energy sources, supported by the Paris Agreement, is the main strategy to mitigate the effects of climate change through the reduction of greenhouse gas emissions. Governments’ tailored climate policies are key in this context to promote a greener economic pathway. Climate policy uncertainty places banks and their credit allocation decisions in a significant position, directly influencing investment choices in the energy sector, including the development and adoption of renewable energy technologies. In this context, credit risk emerges as a crucial factor, as banks, the main lenders, guide the directions of energy investments by granting or withdrawing credit for various energy projects. This study aims to assess the impact of climate policy uncertainty on electricity generation in the U.S. from 1988 to 2015, focusing on non-renewable and renewable sources. The main goal is to investigate the effects that the CPU have on such energy sources. We employ the Fourier-ARDL model and Granger’s causality test to explore the complex relationship between CPU and electricity production. The findings have significant implications for policymakers, managers, and banks, with regard to energy infrastructure investment decisions and lending decisions for the acquisition of such infrastructure.