Waiting or Acting: The Effects of Climate Policy Uncertainty

Abstract

This paper studies the effects of climate policy uncertainty on firms' environmental performances and efforts. I find that firms reduce toxic emissions under high climate policy uncertainty. Instead of a ``wait-and-see'' strategy, firms take pre-emptive actions by accelerating environmental innovation and adopting abatement technologies when climate policy uncertainty arises. Further analyses suggest that institutional investors withdraw capital from polluting firms under high uncertainty of climate regulation. By exploiting the lagged political polarization of the U.S. House roll-call votes and standard deviation of the pro-climate votes in the Senate on environmental and climate change-related bills to instrument the climate policy uncertainty index, I suggest that the effect of climate policy uncertainty on reducing emissions is causal.

Keywords: Climate policy uncertainty, toxic release, environmental innovation, emission abatement, institutional holdings, and climate finance