This paper considers an environmental policy which may be rolled back in future periods by a new administration. We examine how this policy uncertainty reduces firms' incentives to invest in green R&D before the policy is scheduled to come into effect, increasing as a result polluting emissions. We then evaluate the welfare loss generated by policy uncertainty, and compare it against the welfare loss due to abolishing environmental regulation. We identify industries where policy uncertainty can yield larger welfare losses than those from an unregulated externality. We also find under which settings firm profits are larger when environmental policy is likely to remain into effect than rolled back.
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