Real effects of climate policy : financial constraints and spillovers

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