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Real effects of climate policy: Financial constraints and spillovers

Author

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  • Bartram, Söhnke M.
  • Hou, Kewei
  • Kim, Sehoon
Abstract
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 U.S. 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. By contrast, unconstrained firms do not make such adjustments. Overall, unconstrained firms do not reduce their total emissions, whereas constrained firms increase their total emissions after the cap-and-trade rule, undermining the effectiveness of the policy.

Suggested Citation

  • Bartram, Söhnke M. & Hou, Kewei & Kim, Sehoon, 2022. "Real effects of climate policy: Financial constraints and spillovers," Journal of Financial Economics, Elsevier, vol. 143(2), pages 668-696.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:2:p:668-696
    DOI: 10.1016/j.jfineco.2021.06.015
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    More about this item

    Keywords

    Climate policy; California cap-and-trade; Financial constraints; Internal resource allocation; Regulatory arbitrage; Spillover effects;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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