Real Effects of Climate Policy: Financial Constraints and Spillovers
Charles A. Dice Working Paper No. 2019-04
88 Pages Posted: 25 Oct 2018 Last revised: 6 May 2021
Date Written: May 5, 2021
We document that localized policies aimed at mitigating climate risk can have unintended consequences due to regulatory arbitrage by firms. Using a difference-in-differences framework to study the impact of the California cap-and-trade program with United States plant level data, we show that financially constrained firms shift emissions and output from California to other states where they have similar plants that are underutilized. In contrast, unconstrained firms do not make such adjustments. Overall, unconstrained firms do not reduce their total emissions while constrained firms increase total emissions after the cap-and-trade rule, undermining the effectiveness of the policy.
Keywords: Climate policy, California cap-and-trade, financial constraints, internal resource allocation, regulatory arbitrage, spillover effects
JEL Classification: G18, G31, G32, Q52, Q54, Q58
Suggested Citation: Suggested Citation