Climate Policy Uncertainty and Firms' and Investors' Behavior

Despite decades of global attention, effective climate policy implementation remains challenging, with firms and investors often grappling with uncertainty about potential policymaking in addition to actual policy changes. This paper introduces a novel Climate Policy Uncertainty (CPU) index, along with a set of sub-indices capturing the direction of uncertainty, and assesses the impacts of CPU on firm and investor behavior in the United States. Leveraging variation in our indices over the past three decades, we find that uncertainty surrounding climate policies negatively impacts firm financial outcomes, innovation, and stock-market outcomes for firms that are in CO2-intensive sectors, i.e. exposed to climate policy. Higher CPU reduces capital expenditures, employment, and research and development, which in turn translates to a decrease in innovation (patent filings), particularly for clean technologies. On the stock market, CPU leads to increased stock volatility and decreased returns for exposed firms. This negative effect of CPU is distinct from the impact of changes and salience in climate policy as well as variations in economic policy uncertainty. These findings underscore the economic costs of climate policy uncertainty, which delays the low-carbon transition by deterring investment and innovation.