How Policy Uncertainty Is Quietly Driving Carbon Emissions Across Emerging Market Economies

The ADB study finds that economic policy uncertainty increases carbon emissions in emerging markets by delaying green investment, slowing renewable energy adoption, and prolonging reliance on fossil fuels, with lower-income economies facing the greatest impact. It recommends stronger institutions, stable policymaking, carbon pricing, green finance, renewable energy investment, and innovation to help governments, development partners, and businesses build climate resilience while sustaining economic growth.

Economic policy uncertainty is emerging as a significant but often overlooked barrier to climate action in emerging market economies, according to a new Asian Development Bank (ADB) working paper. While uncertainty is usually associated with slower economic growth and weaker investment, the study finds it can also increase carbon emissions by discouraging investment in renewable energy, clean technologies, and low-carbon infrastructure. With emerging market economies now responsible for nearly 60% of global carbon emissions, the research argues that stable and predictable economic policies have become essential for achieving climate goals alongside economic development.

The study analyses annual data from 13 emerging market economies, Brazil, Chile, China, Colombia, Croatia, Greece, Hong Kong, China, India, the Republic of Korea, Mexico, Pakistan, Russia, and Singapore, covering the period from 1990 to 2023. Using advanced econometric modelling, the researchers found that a one-standard-deviation increase in Economic Policy Uncertainty (EPU) leads to a maximum 0.03% rise in carbon emissions over the following four years. Although this increase appears modest, repeated episodes of uncertainty can significantly delay countries' progress toward net-zero emissions by extending dependence on carbon-intensive industries.

Why Economic Uncertainty Leads to Higher Carbon Emissions

The report explains that businesses often delay major investments when future government policies become uncertain. Renewable energy projects, clean manufacturing technologies, and energy-efficient infrastructure usually require high upfront investment and long-term policy certainty. When governments frequently change tax policies, trade regulations, environmental rules, or fiscal priorities, companies postpone these investments and continue using existing fossil-fuel-based infrastructure.

Governments may also delay introducing environmental regulations, carbon pricing systems, or green infrastructure programmes while focusing on short-term economic stability. As a result, cleaner technologies enter the market more slowly, allowing carbon emissions to remain higher for longer. The researchers tested these findings through several statistical methods, including placebo tests and alternative modelling approaches, and found consistent evidence that policy uncertainty itself contributes to higher emissions rather than simply reflecting weaker economic conditions.

Strong Institutions Help Economies Stay on a Green Path

One of the study's key findings is that not all emerging economies respond to uncertainty in the same way. Countries with lower initial carbon emissions experience the strongest increase in emissions during uncertain periods, reaching around 0.05% after four years. These economies often prioritise short-term industrial growth and delay investments in cleaner technologies when policy conditions become unstable.

Income levels also make a significant difference. High-income emerging economies show only limited or statistically insignificant increases in emissions because they generally have stronger institutions, diversified industries, and better financial systems that allow climate investments to continue despite uncertainty. Lower-income economies, however, are more vulnerable because they rely more heavily on carbon-intensive industries and have fewer financial resources to support clean energy transitions.

Political stability further reduces environmental risks. Countries with stable governments and consistent policymaking experience much smaller increases in emissions because long-term environmental strategies continue even during periods of economic uncertainty. In contrast, politically unstable economies often prioritise immediate economic recovery over environmental protection, leading to higher emissions.

Green Finance and Climate Policies Build Long-Term Resilience

The study highlights several policy tools that help economies reduce the environmental impact of uncertainty. Countries that have introduced carbon pricing mechanisms, including carbon taxes or emissions trading systems, show almost no significant increase in emissions during uncertain periods. These policies continue to encourage businesses to reduce emissions regardless of changing economic conditions.

Financial development also plays an important role. Economies with stronger banking systems and capital markets are better able to finance renewable energy projects and sustainable infrastructure even when uncertainty rises. Likewise, countries with greater trade openness benefit from continued access to international investment, advanced technologies, and global climate commitments, making their economies more resilient.

The research also shows that countries with higher shares of renewable energy consumption and greater research and development (R&D) investment experience much weaker environmental impacts from policy uncertainty. Strong innovation ecosystems help businesses continue developing cleaner technologies, while established renewable energy sectors reduce dependence on fossil fuels during economic disruptions.

What Policymakers, Development Partners and Businesses Should Do Next

The findings carry important implications for governments, international development organisations, and private investors. For policymakers, reducing policy uncertainty should become part of national climate strategies. Strengthening institutions, maintaining consistent regulations, expanding renewable energy, improving financial systems, introducing carbon pricing, and increasing investment in research and innovation can all reduce emissions while supporting economic growth.

For international development partners such as multilateral development banks and climate finance institutions, the study suggests that technical assistance should extend beyond infrastructure financing. Supporting institutional reforms, strengthening financial markets, improving governance, and helping countries implement carbon pricing systems can significantly improve long-term climate resilience.

Private-sector stakeholders, including renewable energy developers, manufacturers, financial institutions, infrastructure investors, and technology companies, can also benefit from the findings. Stable policy environments reduce investment risk, improve project viability, and encourage innovation, while economies with weak governance and unpredictable regulations are likely to experience slower green investment and greater transition risks.

The report ultimately concludes that climate policy and economic policy can no longer be treated separately. As emerging markets continue driving global emissions growth, predictable policymaking, stronger institutions, expanded green finance, renewable energy investment, and technological innovation will be critical for ensuring that economic development and climate goals advance together rather than compete with one another.