Real Effects of Climate Policy: Financial Constraints and Spillovers
Charles A. Dice Working Paper No. 2019-04
76 Pages Posted: 25 Oct 2018 Last revised: 24 Oct 2019
Date Written: October 22, 2019
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 US plant level data, we show that financially constrained firms shift emissions and plant ownership from California to other states. In contrast, unconstrained firms do not make such adjustments. Overall, neither constrained nor unconstrained firms reduce their total emissions when only a subset of their plants are affected by 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