State-Level Environmental Policy Uncertainty and Green Investing

This paper investigates the effect of state-level environmental policy uncertainty on green investment and operational decisions. Focusing on the electric utility industry, we document that high state-level environmental policy uncertainty is, on average, associated with a reduced likelihood of investments in new green plants. Next, we examine whether firms operating in states with existing pro-environmental policies (i.e., mandatory renewable portfolio standards) respond differently to uncertainty about future environmental policies. For firms operating in states with mandatory standards, we find that high policy uncertainty does not affect the level of new green plants, suggesting that existing pro-environmental policies serve as a signal about whether and how future environmental policies. We also examine whether market forces create an incentive for firms to invest in green energy even when faced with local policy uncertainty. We find that strong consumer preferences for green policies mitigates the negative affect of high state policy uncertainty on new green investments. Additional analysis reveals that firms invest in green energy when states’ legislative environmental policy uncertainty is resolved. Our findings also indicate that when facing state environmental policy uncertainty, firms hedge “going green” by reducing their disposition of, and increasing output from, fossil fuel plants. Our results speak to the importance of considering environmental policy uncertainty at the state-level, along with the role of current regulations and market forces, in encouraging investments in green energy.