Real Effects of Climate Policy: Financial Constraints and Spillovers

Söhnke Bartram, Kewei Hou and Sehoon Kim
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Kewei Hou: Ohio State University (OSU) - Department of Finance

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

Abstract: We document that localized policies designed to mitigate climate risk can lead to regulatory arbitrage by firms, resulting in unintended consequences. Using detailed plant level data, we investigate the impact of the most extensive regional climate policy in the United States, the California cap-and-trade program, on corporate real activities such as greenhouse gas emissions and plant ownership. We show that industrial plants governed by the policy reduce emissions in California when the parent company is financially constrained, but that these firms internally reallocate their emissions to plants located in other states. Similarly, constrained firms are more likely to reduce ownership in Californian plants and increase ownership in plants outside California. In contrast, unconstrained firms generally do not adjust plant emissions and ownership either in California or in other states. Overall, firms do not reduce their total emissions when part of their assets are affected by the regulation, but in fact increase them if financially constrained. The results document real spillover effects stemming from resource reallocations by constrained firms to avoid regulatory costs, undermining the effectiveness of localized policies. Our study has important implications for the current debate on global climate policy agreements.

JEL-codes: G18 G31 G32 Q52 Q54 Q58 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env and nep-reg
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Citations: View citations in EconPapers (5)

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http://ssrn.com/abstract=3262211

Related works:
Journal Article: Real effects of climate policy: Financial constraints and spillovers (2022)
Working Paper: Real Effects of Climate Policy: Financial Constraints and Spillovers (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2019-04

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