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Forward guidance in climate policy

Author

Listed:
  • Degasperi, Riccardo
  • Hamadi, Tara
  • Natoli, Filippo
  • Nispi Landi, Valerio
  • Pallara, Kevin

Abstract

We examine the macroeconomic implications of the green transition, focusing on the role of carbon policy. Using high-frequency surprises around regulatory events in the EU Emissions Trading System and a Proxy-SVAR framework, we identify two distinct shocks: one to the current policy stance and another to the expected path of the green transition. Both types of shocks reduce greenhouse gas emissions and economic activity, but differ in their inflationary effects. Current stance shocks raise inflation, while path shocks are deflationary. A structural scenario analysis shows that monetary policy easing following a path shock substantially mitigates output losses and moderates the decline in inflation. Moreover, path shocks lower expected growth, depress economic sentiment, and heighten uncertainty, yet they also encourage a shift towards greener assets and reduce climate-related risks. These findings align with the predictions of an environmental New Keynesian model. Our results highlight the importance of forward guidance in climate policy, emphasizing its role in shaping macroeconomic expectations and accelerating the low-carbon transition.

Suggested Citation

  • Degasperi, Riccardo & Hamadi, Tara & Natoli, Filippo & Nispi Landi, Valerio & Pallara, Kevin, 2026. "Forward guidance in climate policy," European Economic Review, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:eecrev:v:186:y:2026:i:c:s0014292126000498
    DOI: 10.1016/j.euroecorev.2026.105305
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    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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