Tracking policy uncertainty under climate change

Abstract

Currently, climate change is one of the world's most crucial challenges. Climate risks could have a substantial and inevitable influence on the economic sectors, financial markets, and households. Most countries have pledged to take more actions to combat climate change. However, a significant uncertainty appears in the design and implementation of climate policies, especially in the timetable, magnitude, and anticipated consequences. In other words, it is uncertain what trends in climate policy are changing. Using the textual method, we build a monthly Climate Policy Uncertainty index for China, India, the United States, and the United Kingdom from the period 2000 to 2020. To gain a better understanding of the index, we compare it with other economic and political uncertainty indexes. Considering the close relationship between climate policy and economic activity, we further conduct the Granger Causality test and explore the response of economic fluctuations to the shock from climate policy uncertainty using the Bayesian VAR model. Our empirical results indicate that the uncertainty of climate policy can lead to steady growth of the fossil fuel industry. Finally, some targeted policies are suggested based on the empirical results.