Working Paper: CEPR ID: DP15986
Authors: Shnke Bartram; Kewei Hou; Sehoon Kim
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 US 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 Codes: G18; G31; G32; Q52; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| California cap-and-trade rule (Q58) | emissions reduction from California plants by financially constrained firms (Q52) |
| California cap-and-trade rule (Q58) | emissions increase from non-California plants by financially constrained firms (Q52) |
| California cap-and-trade rule (Q58) | total emissions increase by financially constrained firms (D25) |
| California cap-and-trade rule (Q58) | no significant change in emissions by unconstrained firms (Q52) |