Switch to pollution control bonds, else carbon risk will switch us: Evidence from the US electric utility firms

This study explores the implications and effectiveness of pollution control bonds (PCBs) in reducing carbon risk, focusing on a sample of 242 U S. electric utility firms from 2012 to 2022. The research investigates the association of PCB issuances with (i) absolute (unscaled) carbon emissions levels and their three scopes; and (ii) carbon emissions intensity and its three scopes. Using quantile regressions covering the 5th, 25th, 50th, 75th, and 90th quantiles, along with the Propensity Score Matching (PSM) methodology (where the treatment group includes firms using PCBs and the control group comprises firms that do not opt for PCBs), the findings show a significant reduction in carbon emissions due to PCB issuance. Substantial differences were observed between the treatment group and the control group across various quantiles of carbon emissions, particularly for companies with medium to high carbon footprints, both in terms of overall CO2 emissions and scope 2 CO2 emissions. Moreover, disparities between the two groups were notable across all quantiles of scope 1 CO2 emissions. Additionally, among the companies using PCBs, those with lower risk profiles exhibited a smaller carbon footprint, measured by scope 3 CO2 emissions, in comparison to their counterparts. Furthermore, the study highlights a more pronounced impact of PCBs issuance during the second phase of the Kyoto Protocol and the commitment period of the Paris Agreement. The results remain robust when alternative measures of carbon risk are applied. These findings carry significant implications for municipal and financing authorities, as well as investors within the U.S. electric utility industry. This research contributes novel insights to the field of electric utility management.