Climate policy uncertainty, which refers to the lack of clarity and predictability surrounding government actions to address climate change, has increased significantly in recent years. This rise is largely due to frequent changes in political administrations and their contrasting approaches to climate policy. Additionally, political debates, unresolved legal and regulatory challenges, and ambiguities in complex climate policy designs have further amplified these uncertainties. While theoretical arguments suggest that these uncertainties stifle investment and output, empirical evidence remains scarce due to challenges associated with measuring climate policy uncertainty as an index. This gap limits our understanding of the economic consequences of climate policy uncertainty and complicates the task of designing effective climate policy.

To address the challenges of measuring policy uncertainty, this study constructs a new news-based index of climate policy uncertainty based on the frequency of newspaper coverage of climate policy–related terms. To identify plausibly exogenous shifts in climate policy uncertainty, we develop an event-based instrument based on a detailed narrative account of the legislative history of U.S. climate policy. We embed this instrument in a semi-structural model of the U.S. economy to estimate the dynamic causal effects of climate policy uncertainty shocks. This framework allows us to trace the effects of these shocks on the U.S. economy at the macroeconomic, firm, and sectoral levels.

This study introduces a groundbreaking method for measuring climate policy uncertainty without intermingling the ripple effects of other economic policies or external shocks. Its findings have important implications for policymakers, showing that stable and predictable regulatory environments can reduce macroeconomic costs and help stabilize investment decisions during the climate transition.

The results also highlight that climate policy uncertainty shocks transmit primarily through supply-side channels, reducing output and investment while raising prices and unemployment. This creates important challenges for monetary policy, as stabilizing economic activity may come into conflict with containing inflation, illustrating the importance of coordinating climate policy with other fiscal and monetary policy.

The research offers a solid framework for examining climate policy uncertainty in various macroeconomic contexts and political systems.