Economic policy uncertainty, carbon emissions and firm valuation: International evidence

Abstract

This paper explores how the uncertainty surrounding economic policies affects the decisions managers make, particularly with reference to carbon emissions. Notably, this is a pioneering effort as very few studies have examined the influence of economic policy uncertainty on decisions about either carbon emissions or renewable energy, and, in turn, the impact of these decisions on firm value. From a sample spanning 22 countries over the period 2007 to 2018, our results show that, while carbon emissions increase with policy uncertainty, this relationship is mediated by renewable energy consumption. Country factors such as climate change performance, emissions trading schemes, and business culture also affect this relationship. In countries where economic policy uncertainty tends to be high, firms generally have a lower market value, due in part to higher levels of carbon emissions. These findings highlight the importance of connecting policy uncertainty to decisions about carbon emissions and renewable energy. They also provide insights into the detrimental effects of policy uncertainty on firm value.