Uncertain Climate Policy as a Source of Macro-Financial Shocks: Evidence from Carbon Futures Volatility

We study forward-looking climate policy uncertainty through a macro-finance lens, focusing on the transmission of climate uncertainty shocks to aggregate and sectoral dynamics. Using monthly U.S. data from 2014 to 2025, we estimate a Bayesian Proxy-SVAR identified with an external instrument derived from the realized volatility of the ICE U.S. Carbon Futures Index, a market directly exposed to climate regulation. This proxy isolates the unexpected and forward-looking component of climate-policy uncertainty. We find that climate uncertainty shocks tighten financial conditions, raise market volatility and financial stress, and reduce output, prices, and stock market valuations, triggering an accommodative monetary policy response. At the sectoral level, we document heterogeneity along two complementary dimensions. A broad green–brown decomposition shows that transition risk exposed (brown) sectors experience deeper and more persistent contractions, whereas less exposed (green) sectors recover faster. We then perform a full sector-by-sector disaggregation of industrial production and valuation responses and match each sector to its EPA supply-chain emission intensity. This granular mapping reveals a systematic relationship between carbon intensity and the severity of climate uncertainty-induced contractions: higher emission industries exhibit larger and more persistent real and financial declines. Overall, forward-looking climate-policy uncertainty acts as a financial amplifier, propagating primarily through volatility and valuation channels and reinforcing the asymmetric dynamics of the low-carbon transition.