Climate policy uncertainty and firms’ and investors’ behavior

Venue :Online Seminars
Host Name :The SEACEN Centre
Date From :10 Aug 2022
Date To :10 Aug 2022


Speaker:  Prof. Stefano Carattini

Affiliation:  Department of Economics, Andrew Young School of Policy Studies, Georgia State University


Abstract: Whether and how firms are affected by uncertainty revolving around the implementation of climate policy is

crucial to understand their behavior as well as investors’, which are interesting per se and also have implications

for the potential for systemic risk related with the coordinated implementation of ambitious climate policy.

Hence, we develop a new index of climate policy uncertainty, covering the United States with monthly-level

variation between 1990 and 2019. We analyze the relationship between climate policy uncertainty and firm-level

outcomes such as stock returns, share price volatility, investments in research and development and patenting,

and employment for all publicly-listed firms in the country. We find that climate policy uncertainty tends to

considerably affect all these outcomes, and often more so than existing indices of economic policy uncertainty.

The direction of the effect may, however, be driven by the underlying source of uncertainty, which we measure

explicitly. In particular, we leverage the fact that climate policy requires the transition from a “dirty” to a

low-carbon equilibrium, with progress and setbacks along the road, which create a promising context to analyze

short-term versus long-run planning and belief revision. Consistently with expectations, we find that climate

policy uncertainty can lead to positive effects on the abovementioned outcomes in periods of setbacks, i.e. when

uncertainty is driven by failure in the climate policy process rather than success.