Valuing Local Climate Policy: Evidence from Firm Behavior and Financial Markets

This paper examines the efficacy of state-level emissions regulations and their local economic effects. Using newly collected data, I find that regulation reduces employment, output, profitability and equity returns in affected industries, but also lowers emissions and emissions intensity, while increasing R&D and capital investment. To interpret these effects, I develop a spatial equilibrium model in which firms choose locations and emissions in response to local carbon taxes. I infer the implicit tax increase corresponding to each regulation from the stock-market reactions of exposed firms and use these values to estimate the model's structural parameters. I use the model to quantify the costs of individual regulations and compare them to the social benefits of reduced emissions. I find that policies targeting utilities and waste management are beneficial, unlike those focused on fossil fuel extraction and manufacturing. On average, endogenous technology switching contributes an additional 20 percent of emissions abatement, whereas relocation undoes about 10 percent of the reductions achieved within the regulated state.