Spillovers from Climate Policy

Abstract

Climate policy spillovers can be either positive or negative since firms change their production processes in response to climate policies, which may either increase or decrease emissions of other pollutants. Understanding these ancillary benefits or costs has important implications for climate policy design, modeling, and benefit-cost analysis. This paper shows how spillovers can be decomposed into output effects (which have ancillary benefits) and substitution effects (which may have ancillary benefits or ancillary costs). The ambiguous net effect highlights the importance of polluters' responses to climate policy. I then test for climate policy spillovers in electricity power generation. The estimates are consistent with ancillary benefits from climate policy arising primarily from reductions in output (primarily at older plants) rather than from changes in emissions rates.