Short Circuited: Costly Transitions Under the Clean Air Act

Tightening future environmental regulations can perversely accelerate fossil-fuel extraction and emissions by lowering prices today, a phenomenon known as the Green Paradox. I introduce a novel mechanism amplifying the Green Paradox, the "depreciation channel,'' whereby firms use soon-to-be-stranded capital more intensively ahead of stricter rules. Exploiting exogenous variation from a shock to legal procedure in implementing U.S. power plant regulations, I demonstrate this channel and quantify its impact. I estimate a 6.5% rise in annual CO2 emissions and air pollution, with an associated social cost of over $22 billion. To mitigate these damages, I argue that the EPA should incorporate these costs into its final target and invoke its emergency authority under the Clean Air Act to curb short-term increases in air pollution.