Guidolin studies the macro-financial implications of climate policy uncertainty

Massimo Guidolin, research unit director of ASSET (Asset and Risk Management) of the Baffi Centre of Bocconi University, is also the principal investigator of research project entitled “Climate Policy Uncertainty and Macro-Financial Dynamics”. We have asked him some questions about the project.

When have you started this research project?

The project officially started on May 15, 2024, under the Baffi “Young Researchers” program. However, our work on this topic began during the previous year as part of an earlier research initiative focused on climate policy uncertainty and its macro-financial implications. The current project has developed as a natural continuation of that work, expanding it with new empirical evidence and a more structured macro-financial framework.

Who is funding this research project?

The project is funded by the Italian Ministry of University and Research (MIUR) under the “Giovani Ricercatore” program. This funding initiative aims to support early-career researchers in developing independent projects on innovative and relevant topics.

What are the research questions?

The project seeks to identify and quantify the macro-financial effects of climate policy uncertainty (CPU) and to clarify the mechanisms through which this uncertainty propagates to the real economy and financial markets. The key research questions are:

1. How does CPU affect key macroeconomic aggregates such as industrial production, inflation, and interest rates?
2. Does CPU act primarily as a demand-type shock—reducing investment and consumption through precautionary savings and financial frictions—or as a supply-type shock—raising production costs and inflation through regulatory uncertainty?
3. How do financial markets, particularly asset prices and price–dividend ratios, react to CPU shocks, and do these effects differ between green and brown sectors?
4. To what extent can carbon futures volatility serve as a reliable proxy for CPU, compared with narrative or text-based measures often used in the literature?
5. Finally, do CPU shocks lead to measurable environmental implications, such as changes in emissions, energy mix, or carbon prices?

By addressing these questions within a Bayesian Structural VAR framework with narrative and sign restrictions, the project aims to disentangle the transmission channels of CPU and assess its role as a new source of macro-financial risk.

Why have you decided to investigate this topic?

Climate policy uncertainty has become a central issue in both economic research and policy debates. The transition toward a low-carbon economy represents one of the most profound structural transformations of our time, and uncertainty surrounding the timing, credibility, and design of climate policies can have major macro-financial consequences.

We decided to investigate this topic because understanding how such uncertainty affects investment, production, and financial valuations is essential to anticipate potential instabilities and to design more effective transition policies. From a research perspective, this is also a rapidly expanding field that combines environmental economics, macroeconomics, and finance — offering new opportunities for methodological innovation and empirical analysis.

Why this topic matters for people?

This topic matters because climate policy uncertainty ultimately affects everyone — not only through environmental outcomes, but also through its impact on jobs, prices, and financial stability. When firms and investors face uncertainty about the direction or credibility of climate policies, they tend to postpone investment decisions, reduce production, or shift resources away from riskier sectors. These reactions can slow down growth, increase volatility, and even delay the green transition itself.

By studying how uncertainty propagates through the economy and financial markets, our research aims to provide insights that can help design more predictable and credible climate policies. Greater policy clarity can reduce volatility, foster investment in clean technologies, and make the transition toward sustainability less costly for households and firms.

In short, understanding the effects of CPU is not just an academic exercise — it is crucial to ensuring that the transition to a low-carbon economy is economically stable, socially fair, and financially sustainable.

What is its impact on people?

Uncertainty about climate policies could translate into higher energy prices, lower investment, and job reallocation across industries. These effects are not abstract — they shape households’ purchasing power, firms’ production costs, and the overall pace of the green transition. Reducing policy uncertainty can therefore make the transition more predictable and less costly for citizens and businesses alike.

What are the implications of this topic for policy makers?

For policy makers, the main implication is that credible, transparent, and well-communicated climate policies can reduce uncertainty, stabilize expectations, and foster both economic growth and investment in the green transition.

Which data are you analysing?

We focus on very recent, aggregate and financial data, covering the period from 2014 onward. The data are generally public. This allows us to exploit high-frequency information from financial markets and industrial activity, capturing short-term reactions to climate-related policy events. We concentrate on this period because the rise in CPU is a relatively recent phenomenon.

What is the state of the project at the moment?

At the moment, the analysis focuses on the United States, where high-frequency and sectoral data are more readily available. This allows us to refine the empirical strategy and test the identification framework in a data-rich environment. However, we do not exclude the possibility of extending the analysis to other major economies in the future, in order to explore cross-country differences in the transmission of CPU shocks.

Is there any conclusion that you can share regarding your research?

At the moment our results suggest that higher climate-related financial uncertainty depresses overall economic activity, with stronger and more persistent effects on brown industries. In contrast, the price–dividend ratio (more generally, financial valuations) initially falls across all sectors but later rises for green industries, indicating a reallocation of investors’ preferences toward greener assets. Overall, these findings confirm that CPU shocks propagates through financial channels, shaping the pace and asymmetry of the green transition.