Waiting for the Courts: Effects 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 affects investment and emissions at coal-fired 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 difference-in-differences approach to compare pollution reductions at power plants located in states subject to more uncertainty to plants in states that that were not. I find that plants with a lower probability of being regulated invested in fewer capital-intensive pollution controls and reduced pollution by 13% less on average. Many of these plants did switch to capital-intensive pollution controls after the court upheld CAIR. Policy uncertainty increased compliance costs by $124 million by delaying efficient investments.