The Cost of Climate Policy to Capital: Evidence from Renewable Portfolio Standards

Many US states have set ambitious renewable portfolio standards (RPS) that require utilities to switch from fossil fuels toward renewables. RPS increases the renewables capacity, bond issuance, maturity, and yield spreads of investor-owned utilities compared to municipal producers that are exempted from this climate policy. Contrary to stranded-asset concerns, the hit to overall firm financial health is moderate. Falling cost of renewables and passthrough of these costs to consumers mitigate the burden of RPS on firms. Using a Tobin’s q model, we show that, absent these mitigating factors, the impact of RPS on firm valuations would have been severe.