Inès Mourelon ((Université Paris Dauphine – PSL)
This paper investigates sectoral reallocations in an economy where climate policy is uncertain. To this end, it develops a Dynamic General Equilibrium model with two sectors – a polluting one and a non-polluting one, along with climate externality and endogenous firm entry. Climate policy uncertainty stems from the possibility that the government may introduce a carbon tax in the next period. I show that, compared to a scenario without climate policy uncertainty, the probability of implementing carbon taxation prompts entrepreneurs to curtail investment in polluting firms’ entry while promoting entry into the non-polluting sector. Through general equilibrium effects, these sectoral reallocations deteriorate welfare, generate a drop in economic activity, and increase CO2 emissions. I provide additional empirical evidence through a VAR model that supports these results. Overall, this paper points out the economic and environmental costs of climate policy uncertainty.