We examine the irreversibility of corporate climate investments under market and political uncertainty. In response to carbon pricing policies, firms generally increase relatively reversible investments, such as product sourcing. However, when carbon pricing is more stringent or the political environment is more stable, firms undertake more irreversible investments, such as joint ventures and research collaborations. These shifts towards irreversibility are more pronounced for high-cost decarbonization technologies and firms with shorter investment horizons. Regionally, EU firms engage in more irreversible investments during later phases of the EU Emission Trading Scheme. U.S. firms undertake more irreversible investments under the Biden Administration than the Trump Administration, but less so for projects targeted by the Inflation Reduction Act, which is subject to higher regulatory uncertainty. Finally, irreversible investments are followed by larger emission reductions. Overall, our findings highlight the importance of the broader political environment in shaping the structure of corporate climate investments in the low-carbon transition.
