Advertisement

Environmental and Resource Economics

, Volume 74, Issue 4, pp 1453–1496 | Cite as

Waiting for the Courts: Effects of Policy Uncertainty on Pollution and Investment

  • Jackson DorseyEmail author
Article
  • 101 Downloads

Abstract

Legal challenges and transitions of political power cause the future of regulatory policies to be uncertain. In this article, I investigate how uncertainty about environmental policy affects investment and emissions at coal-fired power plants. I exploit a legal challenge to the Clean Air Interstate Rule (CAIR) that created variation in the probability that individual plants would need to comply with the new policy. I use a difference-in-differences approach to compare pollution reductions at power plants located in states subject to more uncertainty to plants in states that that were not. I find that plants with a lower probability of being regulated invested in fewer capital-intensive pollution controls and reduced pollution by 13% less on average. Many of these plants did switch to capital-intensive pollution controls after the court upheld CAIR. Policy uncertainty increased compliance costs by $124 million by delaying efficient investments.

Keywords

Policy uncertainty Investment Environmental regulation Air pollution Electricity 

JEL Classification

Q40 Q52 D22 D92 L94 

Notes

Acknowledgements

I thank Derek Lemoine, Ashley Langer, Ian Lange, Meredith Fowlie, Stan Reynolds, Steven Davis, Nicholas Bloom, Gisle Natvik, Eric Rasmusen, two anonymous referees, as well as seminar participants at the CU Environmental Economics Workshop, the University of Arizona, the WEAI Summer Conference, the AERE Summer Conference, and the Stanford SITE Workshop for helpful comments and suggestions.

Supplementary material

References

  1. Abadie A (2005) Semiparametric difference-in-differences estimators. Rev Econ Stud 72(1):1–19Google Scholar
  2. Abadie A, Imbens GW (2006) Large sample properties of matching estimators for average treatment effects. Econometrica 74(1):235–267Google Scholar
  3. Amir R, Germain M, Van Steenberghe V (2008) On the impact of innovation on the marginal abatement cost curve. J Public Econ Theory 10(6):985–1010.  https://doi.org/10.1111/j.1467-9779.2008.00393.x Google Scholar
  4. Baker E, Clarke L, Shittu E (2008) Technical change and the marginal cost of abatement. Energy Econ 30(6):2799–2816Google Scholar
  5. Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. Q J Econ 131(4):1593–1636.  https://doi.org/10.1093/qje/qjw024 Google Scholar
  6. Bernanke BS (1983) Irreversibility, uncertainty, and cyclical investment. Q J Econ 98(1):85–106.  https://doi.org/10.2307/1885568 Google Scholar
  7. Born B, Pfeifer J (2014) Policy risk and the business cycle. J Monet Econ 68:68–85.  https://doi.org/10.1016/j.jmoneco.2014.07.012 Google Scholar
  8. Chao H-P, Wilson R (1993) Option value of emission allowances. J Regul Econ 5(3):233–249Google Scholar
  9. Cicala S (2015) When does regulation distort costs? Lessons from fuel procurement in US electricity generation\(\dagger\). Am Econ Rev 105(1):411–444.  https://doi.org/10.1257/aer.20131377 Google Scholar
  10. Collard-Wexler A (2013) Demand fluctuations in the ready-mix concrete industry. Econometrica 81(3):1003–1037Google Scholar
  11. Dixit AK, Pindyck RS (1994) Investment under uncertainty. Princeton University Press, PrincetonGoogle Scholar
  12. EPA U (2016) Progress report—clean air markets. US Environmental Protection Agency. https://www3.epa.gov/airmarkets/progress/reports/index.html
  13. Fabrizio KR (2012) The effect of regulatory uncertainty on investment: evidence from renewable energy generation. J Law Econ Organ 29(4):765–798.  https://doi.org/10.1093/jleo/ews007 Google Scholar
  14. Federal Register Vol. 70, N. . (Thursday, May 12, 2005) Rule to reduce interstate transport of fine particulate matter and ozone (Clean Air Interstate Rule); Revisions to Acid Rain Program; Revisions to the NOX SIP CallGoogle Scholar
  15. Fernandez-Villaverde J, Guerron-Quintana P, Kuester K, Rubio-Ramirez J (2015) Fiscal volatility shocks and economic activity. Am Econ Rev 105(11):3352Google Scholar
  16. Fowlie M (2010) Emissions trading, electricity restructing, and investment in pollution abatement. Am Econ Rev 100(3):837–869Google Scholar
  17. Gulen H, Ion M (2015) Policy uncertainty and corporate investment. Rev Financ Stud 29(3):523–564Google Scholar
  18. Hassett KA, Metcalf GE (1999) Investment with uncertain tax policy: does random tax policy discourage investment. Econ J 109(457):372–393.  https://doi.org/10.1111/1468-0297.00453 Google Scholar
  19. Hitaj C, Stocking A (2016) Market effciency and the U.S. market for sulfur dioxide allowances. Energy Econ 55:135–147.  https://doi.org/10.1016/j.eneco.2016.01.009 Google Scholar
  20. Hotz VJ, Imbens GW, Klerman JA (2006) Evaluating the differential effects of alternative welfare-to-work training components: a reanalysis of the California GAIN program. J Labor Econ 24(3):521–566Google Scholar
  21. Hurn AS, Wright RE (1994) Geology or economics? Testing models of irreversible investment using north sea oil data. Econ J 104(423):363–371.  https://doi.org/10.2307/2234756 Google Scholar
  22. Jens CE (2017) Political uncertainty and investment: causal evidence from US gubernatorial elections. J Financ Econ 124(3):563–579Google Scholar
  23. Jung C, Krutilla K, Boyd R (1996) Incentives for advanced pollution abatement technology at the industry level: an evaluation of policy alternatives. J Environ Econ Manag 30(1):95–111Google Scholar
  24. Kellogg R (2014) The effect of uncertainty on investment: evidence from texas oil drilling. Am Econ Rev 104(6):1698–1734.  https://doi.org/10.1257/aer.104.6.1698 Google Scholar
  25. Kelly B, Pastor L, Veronesi P (2014) The price of political uncertainty: theory and evidence from the option market. Technical Report, National Bureau of Economic ResearchGoogle Scholar
  26. Kim H, Kung H (2016) The asset redeployability channel: how uncertainty affects corporate investment. Rev Financ Stud 30(1):245–280Google Scholar
  27. Krysiak FC (2008) Prices vs. quantities: the effects on technology choice. J Public Econ 92(5–6):1275–1287.  https://doi.org/10.1016/j.jpubeco.2007.11.003 Google Scholar
  28. Laffont J-J, Tirole J (1996) Pollution permits and compliance strategies. J Public Econ 62(1):85–125Google Scholar
  29. List JA, Haigh MS (2010) Investment under uncertainty: testing the options model with professional traders. Rev Econ Stat 92(4):974–984Google Scholar
  30. McDonald R, Siegel D (1986) The value of waiting to invest. Q J Econ 101(4):707–728.  https://doi.org/10.2307/1884175 Google Scholar
  31. Milliman SR, Prince R (1989) Firm incentives to promote technological change in pollution control. J Environ Econ Manag 17(3):247–265Google Scholar
  32. Moel A, Tufano P (2002) When are real options exercised? An empirical study of mine closings. Rev Financ Stud 15(1):35–64Google Scholar
  33. Muller NZ, Mendelsohn R (2009) Effcient pollution regulation: getting the prices right. Am Econ Rev 99(5):1714–1739.  https://doi.org/10.1257/aer.99.5.1714 Google Scholar
  34. Pakes A (1986) Patents as options: some estimates of the value of holding European patent stocks. Econometrica 54(4):755–784.  https://doi.org/10.2307/1912835 Google Scholar
  35. Pástor L, Veronesi P (2013) Political uncertainty and risk premia. J Financ Econ 110(3):520–545Google Scholar
  36. Pindyck RS (1988) Irreversible investment, capacity choice, and the value of the firm. Am Econ Rev 78(5):969–985Google Scholar
  37. Requate T (2005) Timing and commitment of environmental policy, adoption of new technology, and repercussions on R&D. Environ Resour Econ 31(2):175–199.  https://doi.org/10.1007/s10640-005-1770-x Google Scholar
  38. Requate T, Unold W (2003) Environmental policy incentives to adopt advanced abatement technology: will the true ranking please stand up? Eur Econ Rev 47(1):125–146Google Scholar
  39. Rodrik D (1991) Policy uncertainty and private investment in developing countries. J Dev Econ 36(2):229–242.  https://doi.org/10.1016/0304-3878(91)90034-S Google Scholar
  40. Schmalensee R, Stavins RN (2013) The SO2 allowance trading system: the ironic history of a grand policy experiment. J Econ Perspect 27(1):103–121Google Scholar
  41. Sharpe GW (2009) Update: what’s that scrubber going to cost? Power MagazineGoogle Scholar
  42. Shittu E, Parker G, Jiang X (2015) Energy technology investments in competitive and regulatory environments. Environ Syst Decis 35(4):453–471Google Scholar
  43. Stokey NL (2016) Wait-and-see: investment options under policy uncertainty. Rev Econ Dyn 21:246–265Google Scholar
  44. Teisberg EO (1993) Capital investment strategies under uncertain regulation. Rand J Econ 24(4):591–604.  https://doi.org/10.2307/2555747 Google Scholar
  45. Viscusi WK (1983) Frameworks for analyzing the effects of risk and environmental regulations on productivity. Am Econ Rev 73(4):793–801Google Scholar
  46. Zhao J (2003) Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges. J Public Econ 87(12):2765–2789.  https://doi.org/10.1016/S0047-2727(02)00135-4 Google Scholar

Copyright information

© Springer Nature B.V. 2019

Authors and Affiliations

  1. 1.Department of Business Economics and Public Policy, Kelley School of BusinessIndiana UniversityBloomingtonUSA

Personalised recommendations