Forward guidance in climate policy

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.