Climate Change, Demand Uncertainty, and Firms' Investments: Evidence from Planned Power Plants

Chen Lin, Thomas Schmid and Michael Weisbach
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Thomas Schmid: U of Hong Kong

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: How does demand uncertainty affect firms' investment decisions? We consider this issue from the perspective of electricity-producing firms and their planned investments in new power plants. Using plausibly exogenous variations in temperature predictions across scientific climate models to measure uncertainty about future electricity demand, we find that uncertainty increases investments in plants with flexible production technologies but depresses non-flexible investments. The net effect of uncertainty on investments is positive if firms have access to flexible investment opportunities. These results are consistent with models in which the impact of uncertainty on investments depends on the investments' production flexibility.

JEL-codes: G30 G31 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-cfn, nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2023-23

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