Cap-and-Trade and Financial Constraints: Is Investment Independent of Permit Holdings?

Evangelina Dardati, Julio Riutort

Research output: Contribution to journalReview articlepeer-review

2 Scopus citations

Abstract

We study a new channel by which permit holdings in a cap-and-trade system can affect investment behavior. In the presence of financial constraints, permit holdings can matter through their effect on the firm’s internally available resources and indirectly affect investment. To test this relationship, we exploit the cross-sectional and temporal variation in permit holdings and the temporal variation in the price of permits in the US SO 2 program. We find that capital expenditures are positively related to the market value of the permit holdings. This relationship is stronger for smaller firms and is robust to alternative explanations based on regulatory differences.

Original languageEnglish
Pages (from-to)841-864
Number of pages24
JournalEnvironmental and Resource Economics
Volume65
Issue number4
DOIs
StatePublished - 1 Dec 2016
Externally publishedYes

Keywords

  • Cap-and-trade
  • Electricity sector
  • Financial constraints
  • Investment
  • Permit allocation
  • Permit holdings
  • US SO program

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