Stock Prices and the Cost of Environmental Regulation
Joshua Linn
Working Papers from Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research
Abstract:
Recent environmental regulations have used market incentives to reduce compliance costs and improve efficiency. In most cases, the Environmental Protection Agency (EPA) selects an emissions cap using the predicted costs of reducing pollution. The EPA and other economists have used a "bottom-up" approach to predict the costs of such regulations, which forecast how every affected firm will respond. It is uncertain whether firms rely on the same predictions in making their compliance decisions. This paper uses stock prices to compare the predictions of the bottom-up studies with those of the affected firms. I focus on a recent tradable permit program, the Nitrogen Oxides Budget Trading Program (NBP). Started in 2004, the NBP requires electric generators in the Midwest and East to reduce their emissions or purchase permits from other firms. I compare utilities’ stock prices with the prices that would have occurred in the absence of the new regulation. I make this comparison by exploiting variation in the location of generators owned by utilities; the control group consists of utilities without any generators in the NBP. I estimate that investors expected the program to reduce profits by about $2 billion per year (2000 dollars). Investors expected the NBP to primarily affect coal generators, which have larger baseline emission rates than other fossil fuel generators. These results agree with previous studies that used the bottom-up approach.
Date: 2006-04
New Economics Papers: this item is included in nep-ene, nep-env, nep-fmk and nep-reg
References: Add references at CitEc
Citations:
Downloads: (external link)
http://tisiphone.mit.edu/RePEc/mee/wpaper/2006-011.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:mee:wpaper:0611
Access Statistics for this paper
More papers in Working Papers from Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research Contact information at EDIRC.
Bibliographic data for series maintained by Sharmila Ganguly ( this e-mail address is bad, please contact ).