Transmission of Climate Policy Uncertainty Shocks

Title: Transmission of Climate Policy Uncertainty Shocks

Abstract:  Over the past few decades, we have seen multiple international efforts in reaching a consensus over global warming targets and optimal policy responses to climate change. Imminent warnings over future carbon taxes, for example, can generate huge uncertainty on businesses and the economy. Our paper investigates how uncertainty over a policy shock on a subset of firms can have implications on the real economy, and quantifies this uncertainty as a source of macroeconomic risk. We quantify climate policy uncertainty by using an index based on historical newspaper coverage frequency. We develop a model with firm-to-firm networks to show that the climate policy uncertainty shock propagates through the supply-chain relationships to other sectors and negatively affects investment as well as the value of all firms in an economy. We also show that the magnitude of these effects depends on the structure of the network.