Commitment vs Credibility: Macroeconomic Effects of Climate Policy Uncertainty

Working paper 840
Working Papers
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Gepubliceerd: 02 september 2025

Door: Fulvia Marotta Maria Sole Pagliari Jasper de Winter

This paper introduces a novel media-based index of climate policy uncertainty – the CPU-Concern index – that captures both the prevalence of climate policy uncertainty and the intensity of public concern. Using data from the Netherlands, a setting charac- terized by ambitious climate targets and persistent credibility challenges, we document how policy announcements shape perceived uncertainty through signaling effects. The CPU-Concern index rises during contested policy debates and declines following for- mal ratification, with heterogeneous responses depending on the policy’s ambition and credibility. We show that climate policy uncertainty primarily transmits through shifts in business and consumer sentiment, affecting stock market prices, investments and real activity. Furthermore, negative CPU shocks generate more persistent economic drag than positive ones, while the opposite holds true for nominal variables, thus highlighting asymmetries in how uncertainty shapes behavior and potential policy reactions. Our findings underscore the importance of credible and transparent policy communication in reducing uncertainty and supporting the low-carbon transition.

Keywords: Climate policy uncertainty; text-based measures; policy signaling; media- based indicators; expectation formation; macroeconomic effects
JEL codes Q54; Q58; E66, D84; E32; C43

Working paper no. 840

 

Research highlights:

  • This paper presents the first Dutch climate policy uncertainty (CPU) index, adjusted for article volume and sentiment, since the mid-1980s.
  • We find that legislative timing matters: CPU peaks during the proposal stage and decreases after ratification into law, implying that a swift and credible cycle helps anchor expectations.
  • Higher CPU has significant macroeconomic effects. It dampens business confidence, investment, equity prices and industrial production within a few months. 
  • The expectations channel plays a central role. A counterfactual analysis shows that real-economy effects mostly stem from shifts in economic sentiment and business expectations.
  • Effects are asymmetric: negative CPU shocks have stronger and more persistent adverse impacts compared to the benefits produced by positive ones, amplifying the cost of policy reversals.
  • Negative and positive CPU shocks are different in nature. The former entail a temporary increase in prices, making them more supply-driven. Conversely, the latter exert a more persistent upward pressure on prices, making them more akin to demand-side shocks.

840 - Commitment vs Credibility: Macroeconomic Effects of Climate Policy Uncertainty

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