Known unknowns
Climate policy uncertainty appears to have peaked
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“Uncertainty, actually, is the friend of the buyer of long-term values.”
- Warren Buffett
Climate policy uncertainty in the United States, as measured by the Climate Policy Uncertainty (CPU) index, jumped to a record high of almost 600 in April. Although the index has since dropped to 370 in June (the latest monthly data available), it remains very high compared to the past 10 years.1
The previous highest recorded spikes in uncertainty occurred in November 2021 (coinciding with the COP26 climate summit in Glasgow, UK), and then three years later in November 2024 (following Donald Trump’s re-election and his subsequent announcement that America would be leaving the 2015 Paris Agreement for a second time).
Other prominent spikes in the CPU index over the past decade include in early 2017 when Volkswagen pleaded guilty to for fixing diesel emissions tests, during 2019 when the first Trump administration revoked states rights to set emission standards, early 2020 after Trump approved the environmentally sensitive Keystone XL pipeline, and in the summer of 2022 as the Democrats worked towards the signing of the Inflation Reduction Act (IRA).
Notable as they are, the most important drivers of climate policy uncertainty in America is the election cycle. To determine how significant, analysts at the Geneva Graduate Institute (IHEID) in Switzerland constructed a similar, albeit slightly more sophisticated index of climate policy uncertainty and then cross-matched it with the 6-month period leading up to and following the previous nine US presidential elections.
They discovered that US climate policy uncertainty tends to decline around two months prior to the election as both parties announce relatively favourable environmental policies. Uncertainty then spikes and reaches a peak about four months after the election. It’s typically during those first few months of a new administration when specific policies are announced, and then go through various stages of debate, pushback, and then finally, approval.2
Over the past eight months (or six if you count the months since Trump was sworn in) the president has presaged over a brutal rollback in US environmental policies, culminating in the signing of his “One Big Beautiful Bill” earlier this month. The OBBB Act sounds the death knell for many of the incentives to clean up America’s economy, created and expanded by the 2022 Inflation Reduction Act (see The burning question: What climate legacy will Trump 2.0 leave in his wake?).
Analysis by
suggests that the vast majority of the 2,332 solar and wind projects expected to come online in 2027 or later (amounting to 547 GW of generation capacity) are likely to be at risk of cancellation. Other measures, including a new tax on solar and wind farms for projects in place after 2027 will lead to higher costs, up 10-20% according to estimates by Rhodium.3It’s no surprise that climate policy uncertainty tends to spike around the US presidential election cycle, but has this time been any different? Despite everything the CPU index shows that US climate policy uncertainty has broadly followed the same path as previous elections, albeit with a more pronounced spike in uncertainty post election, and peaking one month later, in April 2025.4
Heightened levels of climate policy uncertainty will weigh on firms at the forefront of the energy transition, increasing the likelihood that they will delay or cancel planned investments in clean energy or decarbonisation. A one standard deviation increase in the CPU index typically results in a 3.8% decline in investment accounting to the OECD, rising to 5.4% for the most carbon intensive firms.
While the CPU index is backward looking, equity markets are (at least in theory) forward looking as participants try to discount the future. And the best returns to investors often occur when the outlook shifts from horrendous, to merely very bad. If the peak in climate policy uncertainty has passed then companies at the forefront of the energy transition have weathered the storm could be in a strong position.
The past four years have been brutal for renewable energy equities as higher interest rates and cost pressures took their toll while the sector fell out of favour with investors. However, unbeknownst to many quick to dismiss the sector as un-investable, the chart below from
shows a market that has been building a large technical pattern, one that was primed to break-out in 2025. Despite all the climate policy uncertainty headwinds the market has broken out of this pattern to the upside over the past few months, and is now up some 20% since April. Perhaps, to paraphrase Buffett’s words, investors have looked upon the upsurge in uncertainty as a friend offering the gift of long-term value.
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Mind the behaviour gap
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The Climate Policy Uncertainty (CPU) index was developed by Konstantinos Gavriilidis from the University of Stirling and is based on the same methodology used by Scott R. Baker et al. to produce the Economic Policy Uncertainty index. It measures the frequency of specific climate policy related words (e.g. uncertainty, climate, emissions, regulation, policy, plus several others) published in eight US newspapers, including the New York Times and the Wall Street Journal.
https://www.policyuncertainty.com/climate_uncertainty.html
The sample period covers 1981 to 2019, and includes nine election cycles, starting with the 1984 presidential election between Reagan and Mondale and up to the 2016 presidential election between Trump and Clinton.
https://www.nber.org/system/files/working_papers/w30361/w30361.pdf
https://www.politico.com/live-updates/2025/06/28/congress/new-tax-on-solar-wind-power-00431388
