Environmental policy uncertainty and cleantech FDI

Laura Nowzohour and Joëlle Noailly

No 3278, Working Paper Series from European Central Bank

Abstract: This paper examines whether environmental policy uncertainty undermines clean-technology investment in the United States by weakening policy-induced investment incentives. Using quarterly project-level data on U.S. greenfield investments from 2007Q1 to 2019Q1, combined with novel news-based indices that separately measure environmental policy salience and environmental policy uncertainty, we find that policy uncertainty substantially offsets the positive investment effects of environmental policy. At the aggregate level, a one-standard-deviation increase in environmental policy uncertainty eliminates roughly 75% of the policy-induced increase in the number of cleantech projects and around 50% of the increase in capital expenditure. The deterrence effect is substantially stronger for foreign than for domestic investors, consistent with greater informational frictions facing cross-border capital. These effects persist for at least two years following an uncertainty shock and are corroborated by country- and firm-level analyses, though results for capital expenditure are less robust at disaggregated levels. The findings imply that policy credibility is a first-order determinant of clean investment: an environmental policy framework that is ambitious but perceived as unstable may fail to mobilize the capital it is designed to attract. JEL Classification: Q58, F21, F23, E22

Keywords: environmental policy; foreign direct investment; green investment; policy uncertainty (search for similar items in EconPapers)
Date: 2026-08
New Economics Papers: this item is included in nep-mac, nep-ppm and nep-res
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263278

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