Innovation Under Uncertainty: Corporate Strategic Responses to Climate Policy Risk

Using a novel climate policy uncertainty (CPU) measure based on emissions legislation, climate protests, and presidential statements, we show that in response to climate policy risk, firms tend to strategically reduce their future innovation, measured by patent counts, citations, and innovation value. Green innovation, however, is less vulnerable than non‐green innovation. We argue that CPU constrains innovation through a precautionary motive: firms under high uncertainty face higher external financing costs and shift from prospector (innovation‐oriented) to defender (cost‐minimizing) strategies. Results are robust to instrumental variable estimation, firm fixed effects, and a difference‐in‐differences design exploiting the Paris Agreement as an exogenous shock. These findings underscore the strategic and policy implications of uncertainty in the transition to a low‐carbon economy. Overall, our results provide insights into policy implications.