Sohnke Bartram (Warwick Business School)

“Real Effects of Climate Policy: Financial Constraints and Spillovers”

Abstract: We document that localized policies aimed at mitigating climate risk can have unintended consequences due to regulatory arbitrage by firms. Studying the impact of the California cap-and-trade program with U.S. plant level data, we show that financially constrained firms shift emissions and plant ownership from California to other states as the cost for carbon allowances alters the relative profitability of their plants across states. In contrast, unconstrained firms respond insignificantly. Overall, firms do not reduce their total emissions when part of their assets are affected by the cap-and-trade rule, undermining the global effectiveness of the policy.