Low-carbon investment volatility under policy uncertainty: Evidence from equity markets and implications for carbon capture deployment

Abstract

Policy uncertainty can destabilize investments in carbon capture, utilization, and storage (CCUS) by heightening market volatility. However, the impact of climate policy uncertainty (CPU) on emerging low-carbon financial markets remains insufficiently understood, particularly across different countries. To address this gap, we conduct the first cross-country analysis of how CPU and general economic policy uncertainty (EPU) affect CCUS-related equity volatility in China, the United States, and Russia. Using GARCH-X and EGARCH-X volatility models with CPU and EPU indices as exogenous variables, we find that elevated policy uncertainty—whether climate- or economy-related—significantly increases volatility in CCUS equity returns. Moreover, our EGARCH-X results reveal an asymmetric leverage effect: upward spikes in policy uncertainty trigger disproportionately larger volatility surges than equivalent declines in uncertainty reduce volatility. This positive uncertainty–volatility relationship is evident in all three countries. We also observe that EPU shocks generally exert a stronger impact on CCUS market volatility than CPU shocks, except in China where climate-policy signals are especially potent amid active decarbonization efforts. These findings provide novel empirical evidence linking policy uncertainty to CCUS investment risk and quantify its effect on financing conditions. By filling a crucial gap in literature, our study underscores the importance of stable, credible policy frameworks for reducing the cost of capital in low-carbon technology deployment.