On the Reallocation Effects of Global Coordination Failure in Decarbonization

This paper studies the effects of international coordination failure on resource allocations. Employing the U.S. withdrawal from the 2015 Paris Agreement as an experiment, we find that U.S. polluting firms increase their emissions and receive bank financing at lower costs after the sudden withdrawal. In sharp contrast, climate-vulnerable U.S. firms face a significant increase in loan spreads after the withdrawal. Consistent with cross-subsidization, these climate-vulnerable firms are also crowded out by the growth of polluting firms. These detrimental effects after the withdrawal of the federal government are somewhat mitigated in U.S. states that participated in the bipartisan Climate Alliance coalition. Further analyses reveal that polluting firms strategically shift their operations away from those states to non-Alliance states. Consistent with a global coordination failure, we observe similar patterns in emissions and loan spreads of polluting firms in countries that remain in the treaty after the U.S. withdrawal, especially in countries with weaker commitments to the treaty and whose cultures are more short-term oriented