A taxonomy for regulatory uncertainty—application to the European Emission Trading Scheme

Research on environmental uncertainty typically distinguishes between different sources of uncertainty according to the different environments that a company interacts with. The regulatory environment and associated uncertainties become especially important when investigating the subject of pollution reduction. Many researchers have started to investigate the effects of environmental regulation on innovation, however, only little is known about the role of regulatory uncertainty in this context. We provide a taxonomy of regulatory uncertainties by building on the Miles and Snow scale of environmental uncertainty. We apply this taxonomy to uncertainties in current climate policy and test it based on a survey among companies that are subject to the European Emission Trading Scheme (EU ETS), a flexible mechanism of the Kyoto-Protocol. Our results show that the EU ETS creates uncertainties in all categories of our taxonomy and suggest further research to better understand how different regulatory uncertainties affect companies’ business decisions.