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

Author

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  • Evangelina Dardati

    (ILADES - Universidad Alberto Hurtado)

  • Julio Riutort

    (Universidad Adolfo Ibáñez)

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 $$\hbox {SO}_2$$ 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.

Suggested Citation

  • Evangelina Dardati & Julio Riutort, 2016. "Cap-and-Trade and Financial Constraints: Is Investment Independent of Permit Holdings?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(4), pages 841-864, December.
    • Handle: RePEc:kap:enreec:v:65:y:2016:i:4:d:10.1007_s10640-015-9916-y
    DOI: 10.1007/s10640-015-9916-y
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