Waiting on the Courts: Eects of Policy Uncertainty on Pollution and Investment

Legal challenges and transitions of political power cause the future of regulatory policies to be uncertain. In this article, I investigate how uncertainty about environmental policy a‚ects investment and emissions at coal-€red power plants. I exploit a legal challenge to the Clean Air Interstate Rule (CAIR) that created variation in the probability that individual plants would need to comply with the new policy. I use a di‚erence-in-di‚erences approach to compare pollution reductions at power plants located in states subject to more uncertainty to plants in states that that were not. I €nd that plants with a lower probability of being regulated invested in fewer capital-intensive pollution controls and reduced pollution by less overall. Many of these plants did switch to capital-intensive pollution controls a‰er the court upheld CAIR. Regulatory uncertainty increased compliance costs by $252 million by delaying ecient investments. JEL Codes: Q40, Q52, D22, D92, L94 ∗Department of Economics, University of Arizona (e-mail: [email protected]). I thank Derek Lemoine, Ashley Langer, Ian Lange, Meredith Fowlie, Stan Reynolds, Steven Davis, as well as seminar participants at the CU Environmental Economics Workshop, the University of Arizona, and the WEAI AERE sessions for helpful comments and suggestions.