Climate Policy Risk and Corporate Financial Decisions: Evidence from the NO_x Budget Trading Program.

This article examines how manufacturing firms adjusted their capital structure and other financial policies in response to the 2004 implementation of the Nitrogen Oxides (NOx) Budget Trading Program (NBP), a regional cap-and-trade regulation targeting NOx emissions from power plants in 11 midwestern and southeastern U.S. states. The study finds that the NBP induced a significant electricity price shock, leading affected manufacturers to adopt more conservative capital structures by reducing financial leverage due to increased operating leverage and financial distress risk. Firms with higher electricity intensity, greater financial distress vulnerability, or facing stronger competitive pressure exhibited more pronounced adjustments. Additionally, the regulation raised firms’ debt costs, shifted debt composition toward private borrowing, and prompted reductions in payouts and investments, highlighting multifaceted corporate responses to climate policy risk and its potential unintended consequences for the corporate sector.