Influence of Geopolitical Risk on Energy Transition and Climate Change

ABSTRACT

Geopolitical tensions can influence energy transition, which, in turn, can impact climate change. Thus, we construct a framework that integrates these processes, analyzing 17 economies from 1990 to 2020 using a GVAR model. We hypothesize that geopolitical risk shocks affect economies through domestic financial markets. The results demonstrate that geopolitical risk shocks (i) hinder national energy transitions and contribute to increased carbon emissions; (ii) induce fluctuations in financial markets; (iii) have a minor direct impact on energy transition, except in Scandinavia and the United States; (iv) indirectly influence economies through financial markets (particularly stock markets); and (v) generate spillover effects and heterogeneities. We corroborate our findings through shock identification, treating financial markets as conduits for the geopolitical risk shock. Additionally, we conduct a battery of robustness checks addressing structural breaks, time‐varying bilateral trade, and bilateral financial flows (instead of bilateral trade), all of which confirm the consistency of our results. We conclude by discussing fiscal policies aimed at counterbalancing the negative effects of geopolitical risk on energy transition and climate change, emphasizing the importance of international cooperation for the effectiveness of these policies.