Real Effects of Climate Policy: Financial Constraints and Spillovers

88 Pages Posted: 25 Oct 2018 Last revised: 6 May 2021

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

University of Warwick; Centre for Economic Policy Research (CEPR)

Kewei Hou

Ohio State University (OSU) - Department of Finance

Sehoon Kim

University of Florida - Department of Finance, Insurance and Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: May 5, 2021

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 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

Bartram, Söhnke M. and Hou, Kewei and Kim, Sehoon, Real Effects of Climate Policy: Financial Constraints and Spillovers (May 5, 2021). Journal of Financial Economics (JFE), Forthcoming, Fisher College of Business Working Paper No. 2019-03-004, Charles A. Dice Working Paper No. 2019-04, Available at SSRN: https://ssrn.com/abstract=3262211 or http://dx.doi.org/10.2139/ssrn.3262211

Söhnke M. Bartram

University of Warwick ( email )

Warwick Business School
Finance Group
Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Kewei Hou

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Sehoon Kim (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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