Policy Uncertainty and Investment in Low-Carbon Technology∗

In the context of an emission trading scheme, we study how uncertainty over environmental policy affects firm investment in low-carbon technolo-gies. We develop a three period sequential model combining the industry and electricity sectors and encompassing both irreversible and reversible investment possibilities for firms. Additionally, we explicitly model pol-icy uncertainty in the regulator’s objective function as well as the market interactions giving rise to an endogenous permit price. We find that un-certainty reduces irreversible investment and that the availability of both reversible and irreversible technologies partially eliminates the positive effect of policy uncertainty on reversible technology found in previous lit-erature