EU Climate Change News Index: Forecasting EU ETS prices with online news

Carbon prices have been rapidly increasing in the EU since 2018 and accurate forecasting of EU Emissions Trading System (ETS) prices has become essential. This paper proposes a novel method to generate alternative predictors for daily ETS price returns using relevant online news information. We devise the EU Climate Change News Index by calculating the term frequency–inverse document frequency (TF–IDF) feature for climate change-related keywords. The index is capable of tracking the ongoing debate about climate change in the EU. Finally, we show that incorporating the index in a simple predictive model significantly improves forecasts of ETS price returns. •The EU Climate Change News Index is created based on the GDELT online news database.1•The index is used as an alternative predictor for carbon prices.•Online news brings predictive power to carbon price forecasting models.