Experts have termed the policy uncertainty and climate change denial during the Donald Trump administration a source of macroeconomic instability. It is a classic supply-side shock rather than a simple demand-side slump.
Economists Konstantinos Gavrilidis, Ramya Raghavan, and Jim Stock published a new paper, titled “The Macroeconomic Effects of Climate Policy Uncertainty,” stating that climate policy uncertainty curbs investments, output, and employment while increasing prices. They found that climate change denial has stagflationary effects that compound and complicate policy responses.
By analysing millions of newspaper articles dating back to the 1980s, these economists created a monthly index of US climate policy uncertainty that tracks legislative debates, regulatory reversals, and shifts in international climate commitments.
Their research found that when this index spikes, such as during the 2009 Waxman-Markey Cap and Trade Bill or the 2017 US withdrawal from the Paris Agreement, macroeconomic models indicated that businesses respond by cutting back on investment, scaling down production plans, and postponing hiring and research.
Simultaneously, the risk of future tightening in emission standards or compliance costs raises expected future production costs, which helps transmit the uncertainty into higher applied prices.
When company policies change unpredictably, companies become uncertain. They act or respond to policy uncertainty just like they would to a financial risk, such as currency swings or interest rate moves.
Firms related to climate change risks, such as energy producers, heavy manufacturers, car makers, and even big tech firms with large data centre footprints, don’t treat climate rules as a distant problem. They begin to adjust spending, borrowing, and hiring plans according to climate policy.
The report reveals that when climate policy uncertainty occurs, firms cut back on capital spending, resulting in fewer new factories, power plants, production lines, and renewable energy projects. This shift can lead to a 5%-15% drop in annual investments for exposed companies over a few years, depending heavily on the intensity of the regulatory back-and-forth.
Furthermore, there is a notable scale-back on research and development, particularly in clean tech. Since green energy often only becomes profitable under strict emission rules, this uncertainty inadvertently slows down innovation in several key areas, including battery storage, electric vehicles, and industrial decarbonisation.
In simple terms, when businesses can’t be sure what climate rules will look like in five to ten years, they stop treating climate policy just as a policy issue and start treating it as a real financial risk that affects how much they build, invent, hire, and borrow.
Companies seen as more vulnerable to climate rules often see their stock prices suffer or become more volatile, and their borrowing costs also rise slightly. Even analyst ratings turn a little bit more cautious.
The cost of uncertainty that businesses absorb is then fed back into the broader economy, making growth slower and transitions bumpier than they would be if there were clear, stable rules.