30 January 2023

Environmental Policy and the Low-Carbon Transition

In her PhD essays, Laura Minu Nowzohour uses both theoretical models as well as text-mining and econometric techniques to investigate, inter alia, how policy uncertainty delays investments for the low-carbon economy, thereby representing a key bottleneck in addressing the urgency of climate action.

Why did you decide to study the nexus between environmental policies and the low-carbon transition?

In recent decades, environmental regulations have alternated between periods of increasing stringency and sudden rollbacks. For instance, over the course of its mandate, the Trump administration not only announced its withdrawal from the Paris climate agreement, but also conducted a comprehensive review of many federal environmental regulations. These changes created a surge in uncertainty about the state of future environmental regulations and beg the question which role such environmental policy uncertainty plays for investments towards a low-carbon transition. While this is by no means a new question, the literature so far has been limited by a lack of robust and quantitative indicators to measure environmental policy uncertainty. This is what we set out to change when we started working on the NRP73 project Financing Investments in Clean Technologies.

Why should we study environmental policy uncertainty? What distinguishes it from general economic policy uncertainty?

Well, a lot. Against the backdrop of an increasingly severe climate crisis, policymakers at climate conferences are keen to find ways to better mitigate and adapt to climate change. And there are some key features that set them apart from standard investments. First, green investments tend to rely more heavily on policy support because it is often the policies themselves that make green investments profitable (as they usually compete with more profitable dirty alternatives). Second, environmental policies are primarily intended to spur capital-intensive, long-term investment rather than being a tool for countercyclical stabilisation as standard macroeconomic policies tend to be. Third, the type of disruptive green innovation we need to see to reach the Paris climate goals is likely to come from new market entrants, such as young green start-ups, who tend to be considered risky types of investment. It is thus unlikely that capital at the required scale will be amassed if policies fail to harness private investment for the low-carbon transition. 

Your PhD thesis consists of five “Essays in Environmental Macroeconomics”. Can you describe them? 

My first single-authored chapter, “Can Adjustment Costs in Research Derail the Transition to Green Growth?”, is a theoretical contribution, where I show that adjustment costs materially raise the risk of reaching an environmental disaster, although policymakers can mitigate these risks. My second and third co-authored chapters, “Heard the News? Environmental Policy and Clean Investments” and “Does Environmental Policy Uncertainty Hinder Investments towards a Low-Carbon Economy?”, develop novel news-based indices of US environmental policy (EnvP) and policy uncertainty (EnvPU) based on text-mining techniques. Our results are consistent with the notion that while EnvP is crucial in facilitating the low-carbon transition, EnvPU sabotages these efforts through the back door. My fourth single-authored chapter, “Does Environmental Policy Uncertainty Deter Clean-Tech FDI?”, shows that cleantech foreign direct investment (FDI) in the US reacts to EnvP(U) in a qualitatively similar manner as the domestic investment in the previous chapter, with stronger effects for foreign than for domestic investors. My final co-authored chapter, “Why Some Don’t Belong – The Distributional Effects of Natural Disasters”, shows that within-country income inequality tends to increase significantly following severe and repeated severe disasters in a large international sample. 

Let me zoom into on chapter 3 here. In “Does Environmental Policy Uncertainty Hinder Investments towards a Low-Carbon Economy?” my co-authors, Professor Joëlle Noailly and Matthias van den Heuvel, and I examine the relationship between environmental policy uncertainty and investments in the low-carbon economy. To do so, we construct a news-based index of environmental policy uncertainty (EnvPU) by using supervised machine-learning algorithms on articles about environmental policy extracted from the archive of ten US newspapers over the 1990–2019 period. More precisely, our EnvPU index represents the share of regulatory uncertainty news among environmental policy articles in a given month. Relying on newspapers is a significant advantage of this study as they provide a broad set of textual information on environmental policy at a high frequency over long periods. Because newspapers allow us to continuously track environmental policy over time, we can compare the intensity of policy uncertainty over various periods. This is particularly important for a transient concept like uncertainty. In addition, journalists’ writing directly affects how readers perceive the uncertainty around given topics. As a result, using newspaper articles is a great way through which to tap into investors’ state of mind. Our main contribution is to propose a new methodology based on machine-learning algorithms for text classification, enabling us to retrieve meaningful information from text accurately.

We find that policy uncertainty is pervasive in the history of US environmental policy and tends to rise around salient events and election cycles. We further examine how our environmental policy uncertainty index relates to investments in the low-carbon economy, which are by nature more dependent on policy support. In firm-level estimations, we find that our index is associated with a reduced probability for cleantech start-ups to receive venture capital (VC) funding, in particular for clean energy start-ups characterised by capital-intensive investments that are difficult to reverse. In financial markets, a rise in our EnvPU index is associated with higher stock volatility for firms with above-average green revenue shares. At the macro level, shocks in our index are associated with declines in the number of cleantech VC deals and higher volatility of the main benchmark clean energy exchange-traded fund. Overall, our results are consistent with the notion that policy uncertainty delays investments for the low-carbon economy, thereby representing a key bottleneck in addressing the urgency of climate action.

What could be the social and political implications of your thesis? 

Although my research should be considered independent of political agendas, it does have some implications. First, my results generally underline the central role of the state as a facilitator of the low-carbon transition. Moreover, they imply that stringent, timely and reliable environmental policies are crucial in: (i) preventing catastrophic outcomes due to excess cumulative emissions (chapter 1), (ii) facilitating the necessary green investments domestically (chapters 2 and 3) and across borders (chapter 4), and (iii) raising countries’ resilience to natural disasters (chapter 5). 

An interesting special case is displayed in chapter 1: in the presence of short-run frictions, which might pose a bottleneck to long-run transitions in line with the Paris goals, environmental policies have to be more stringent in the very close future and, if frictions remain unaddressed via targeted policies, the transition they implement will be slower than what one might expect from models mimicking a frictionless world. Therefore, a policy implication here is the need to properly monitor these potential short-run bottlenecks (e.g. labour market frictions, financial frictions, etc.) and address these directly. Moreover, according to this model, robust climate policies should err on the side of stringency. 

What are you doing now?

I am in the economist graduate programme at the European Central Bank where I work on climate issues in the financial stability directorate. More specifically, I am part of a team chairing the work stream on climate scenarios of the Network for Greening the Financial System, a global group by central banks and regulators, with the aim to enable the financial system to measure and account for climate risks.

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Laura Minu Nowzohour defended her PhD thesis in International Economics in October 2022. Professor Beatrice Weder di Mauro presided the committee, which included Professor Cédric Tille and Lecturer Joëlle Noailly, Thesis Co-Supervisors, and Julien Daubanes, Assistant Professor, Geneva School of Economics and Management, University of Geneva.

Citation of the PhD thesis:
Nowzohour, Laura Minu. “Essays in Environmental Macroeconomics.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2022.

Access to the PhD thesis:
Members of the Geneva Graduate Institute can access the PhD thesis on this page of the Institute’s repository. Others may contact Dr Nowzohour at

Banner image: excerpt from a picture by Romolo Tavani/