Stock prices and the cost of environmental regulation
Recent environmental regulations have used market incentives to reduce compliance costs and improve efficiency. In most cases, the Environmental Protection Agency (EPA) selects an emissions cap using the predicted costs of reducing pollution. The EPA and other economists have used a "bottom-up&...
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| Format: | Working Paper |
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MIT Center for Energy and Environmental Policy Research
2009
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| Online Access: | http://hdl.handle.net/1721.1/45057 |
| _version_ | 1826196481575485440 |
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| author | Linn, Joshua |
| author2 | Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research. |
| author_facet | Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research. Linn, Joshua |
| author_sort | Linn, Joshua |
| collection | MIT |
| description | Recent environmental regulations have used market incentives to reduce compliance costs and improve efficiency. In most cases, the Environmental Protection Agency (EPA) selects an emissions cap using the predicted costs of reducing pollution. The EPA and other economists have used a "bottom-up" approach to predict the costs of such regulations, which forecast how every affected firm will respond. It is uncertain whether firms rely on the same predictions in making their compliance decisions. This paper uses stock prices to compare the predictions of the bottom-up studies with those of the affected firms. I focus on a recent tradable permit program, the Nitrogen Oxides Budget Trading Program (NBP). Started in 2004, the NBP requires electric generators in the Midwest and East to reduce their emissions or purchase permits from other firms. I compare utilities' stock prices with the prices that would have occurred in the absence of the new regulation. I make this comparison by exploiting variation in the location of generators owned by utilities; the control group consists of utilities without any generators in the NBP. |
| first_indexed | 2024-09-23T10:27:38Z |
| format | Working Paper |
| id | mit-1721.1/45057 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T10:27:38Z |
| publishDate | 2009 |
| publisher | MIT Center for Energy and Environmental Policy Research |
| record_format | dspace |
| spelling | mit-1721.1/450572019-04-12T09:56:16Z Stock prices and the cost of environmental regulation Linn, Joshua Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research. Recent environmental regulations have used market incentives to reduce compliance costs and improve efficiency. In most cases, the Environmental Protection Agency (EPA) selects an emissions cap using the predicted costs of reducing pollution. The EPA and other economists have used a "bottom-up" approach to predict the costs of such regulations, which forecast how every affected firm will respond. It is uncertain whether firms rely on the same predictions in making their compliance decisions. This paper uses stock prices to compare the predictions of the bottom-up studies with those of the affected firms. I focus on a recent tradable permit program, the Nitrogen Oxides Budget Trading Program (NBP). Started in 2004, the NBP requires electric generators in the Midwest and East to reduce their emissions or purchase permits from other firms. I compare utilities' stock prices with the prices that would have occurred in the absence of the new regulation. I make this comparison by exploiting variation in the location of generators owned by utilities; the control group consists of utilities without any generators in the NBP. (cont.) I estimate that investors expected the program to reduce profits by about $2 billion per year (2000 dollars). Investors expected the NBP to primarily affect coal generators, which have larger baseline emission rates than other fossil fuel generators. These results agree with previous studies that used the bottom-up approach. 2009-04-03T17:07:23Z 2009-04-03T17:07:23Z 2006 Working Paper 2006-011 http://hdl.handle.net/1721.1/45057 159938603 MIT-CEEPR (Series) ; 06-011WP. 25, [9] application/pdf MIT Center for Energy and Environmental Policy Research |
| spellingShingle | Linn, Joshua Stock prices and the cost of environmental regulation |
| title | Stock prices and the cost of environmental regulation |
| title_full | Stock prices and the cost of environmental regulation |
| title_fullStr | Stock prices and the cost of environmental regulation |
| title_full_unstemmed | Stock prices and the cost of environmental regulation |
| title_short | Stock prices and the cost of environmental regulation |
| title_sort | stock prices and the cost of environmental regulation |
| url | http://hdl.handle.net/1721.1/45057 |
| work_keys_str_mv | AT linnjoshua stockpricesandthecostofenvironmentalregulation |