Climate Policy Uncertainty and Strategic Advantage

When faced with new policies, firms must decide whether to "wait and see" or invest in new #technologies and processes to comply. But how can companies make informed decisions when #policy implementation is uncertain? My latest research with Eun-Hee Kim and Maggie Zhou offers insights! We found that firms can gauge policy implementation commitment by analyzing communication exchanges between regulatory agencies and policymakers. Costlier agency communication signals stronger future policy implementation, encouraging firms to invest in long-term technologies. Empirically, we delved into the early years of the European Union's Emissions Trading Scheme (EU-ETS), a policy aimed at reducing #greenhouse gas emissions. We examined the European electric power investments in #renewable energy facilities (2004-2009) in response to country-level agency communications to the EU Commission. During this period, #carbon allowances were freely given away, #emission caps were not binding, and it was unclear whether country agencies would strictly implement the #EU-ETS. These, combined with the plunging price of carbon during the 2007–2009 financial crisis, cast doubt on any concrete, short-term return on emissions-reducing investments. Read our full paper to learn how firms can strategically respond to policy implementation uncertainty. https://lnkd.in/guzzc7Fz #policyuncertainty #strategy #sustainability #energy #regulation USC Marshall School of Business

Carbon Price Uncertainty Depresses Decarbonization Investments. ❗ New Paper Alert (with Julian Terstegge and Maximilian Fuchs) - We construct a new market-based measure of carbon price uncertainty (the Carbon VIX) based on data from options on carbon allowances in the EU ETS. - Carbon price uncertainty is high and varies over time - Increases in carbon price uncertainty have large negative effects on expected decarbonization investments, consistent with real options theory. ➡ Policy makers can have as much impact on encouraging firms to decarbonize by reducing uncertainty about expected future prices as they have by raising the expected level of future prices Paper and Data to Download at https://www.carbonvix.org/ Abstract: We study the effects of carbon price uncertainty on firms’ decisions to decarbonize their operations. We first use information on the pricing of options on emission allowances in the European Emissions Trading System to create the Carbon VIX, a market-based high-frequency measure of carbon price uncertainty. Carbon price uncertainty is high, varies substantially over time, and experiences persistent shocks around major climate policy events. To explore the effects of carbon price uncertainty on expected aggregate decarbonization investments, we analyze its effect on the stock returns of firms that help other businesses decarbonize. To identify these “carbon solution providers,” we extract common types of decarbonization investments from a large survey of firms, and then identify companies that offer the associated goods and services. We find that the stock returns of these carbon solution providers vary positively with carbon prices, but negatively with carbon price uncertainty. The effect of increases in carbon price uncertainty on our proxy for expected decarbonization investments is economically large and of similar magnitude as the effect of declines in carbon prices. These findings support predictions from real options theory that firms may delay investments in decarbonization when faced with uncertainty about the future costs of emissions.

Early stage climate investing impacts of Trump 2.0 through the lens of an LLM observing our teams post election investment committee discussions - 1. IRA Implementation Challenges reflect deep concerns about program execution rather than just policy changes. The team noted that even without formal rollbacks, administrative cuts or friction could effectively neutralize IRA benefits. They discussed how bureaucratic slowdown and uncertainty around decision-making could make programs practically inaccessible even while technically remaining in place. This led them to pass on at least one investment opportunity that was heavily dependent on smooth IRA implementation, demonstrating how these concerns are actively shaping investment decisions. 2. The Municipal/State Level discussion focused on the potential for local action to provide some stability amid federal uncertainty. The team explored how in the past some cities and states led on climate initiatives and could continue pushing climate initiatives forward regardless of federal stance. This created an interesting tension between seeing local government as a source of stability while recognizing its resource limitations. 3. Market Psychology emerged as a crucial factor in their analysis. The team explored how regulatory uncertainty affects behavior throughout the market - from individual bureaucrats becoming more risk-averse in approvals to customers hesitating on purchasing decisions. They highlighted how market participants' fear of potential changes can freeze activity even before any actual policy shifts occur. This psychological impact appears to act as a force multiplier for regulatory uncertainty, potentially affecting markets faster and more severely than formal policy changes. 4. Unsubsidized Business Models. The team is continuing to focus on finding companies that can succeed primarily on economics rather than regulatory support. They discussed adjusting valuations to account for increased regulatory risk and showed particular interest in business models that could maintain growth even in adverse political environments.

US cleantech's $8B setback opens doors for European innovation. Here's why energy leaders should be watching both sides of the Atlantic: 🌍 A new report reveals that $8 billion in renewable energy projects were canceled in the US during Q1 2025 alone—more than three times the cancellations from the previous 30 months combined. The culprit? Uncertainty around the future of clean energy tax incentives. While companies like Tesla still announced new investments (including a $200M battery factory in Houston), major projects from Bosch and Freyr Battery have been shelved as the policy landscape shifts. Across the Atlantic, Europe is taking a different approach. The European Commission recently unveiled a €100 billion "Clean Industrial Deal" aimed at supporting made-in-EU clean manufacturing. They're also streamlining permitting for strategic projects and creating mechanisms to direct private capital toward cleantech. This creates an intriguing dynamic for the global energy transition: 1. Market Rebalancing - US project pipelines facing disruption despite strong fundamentals - European regulators offering more predictable investment pathways - Potential for transatlantic partnerships rather than simple relocations 2. Strategic Considerations - Former US energy officials suggest Europe could fast-track companies already vetted by US agencies - Supply chain resilience becoming a critical factor in business planning - Regional approaches to innovation and manufacturing diverging 3. Economic Impacts - Republican districts seeing the highest rate of project cancellations despite receiving 83% of previous investments - European industrial strategy explicitly targeting supply chain localization - Global competition for cleantech manufacturing intensifying For energy professionals, these parallel developments create both challenges and opportunities as the policy landscape evolves on both sides of the Atlantic. Question: How might cleantech companies structure their operations to navigate policy uncertainty while maintaining momentum? What successful strategies have you observed? #CleanEnergy #EnergyPolicy #GlobalMarkets

You can’t comply your way to strategy. We’re seeing a dangerous pattern right now: Companies are treating climate regulations like another checkbox. ✅ Carbon disclosures ✅ Risk statements ✅ Supplier mapping But when you ask, “What’s this data for?” Most can’t give a strategic answer. SB 253 and SB 261 are forcing companies to surface data they’ve never had to gather before. That’s good. But what happens next? The point isn’t just to publish a compliant report. It’s to use that data to make better decisions. — Which suppliers expose you to the highest transition risk? — Where can you redesign products or shift sourcing to get ahead of regulation? — How do you de-risk revenue in markets with stricter climate policy? That’s where the real business value is. The problem is that most companies are stuck in “reporting mode.” They’re not investing in the structure, process, systems, and collaboration to turn that data into insight. Compliance is the floor. Strategy is what happens when you treat sustainability as part of your commercial roadmap, not just your legal obligation.