This paper examines how cap-and-trade programs influence asset reallocation in the United States power sector. Using the staggered implementation of the Regional Greenhouse Gas Initiative and California’s Cap-and-Trade Program, I show that electricity producers undertake substantial reallocation of generating assets in response to carbon pricing. Within regulated states, producers with greater exposure to carbon costs divest fossil-fuel plants and expand their holdings of renewable plants. Interestingly, asset allocation decisions are not confined to regulated areas only. Once subject to cap-and-trade, producers significantly reshape their portfolios in unregulated states by shifting toward cleaner assets. Two mechanisms appear to drive this spillover effect. First, producers anticipate policy diffusion to nearby states. Second, carbon pricing spurs innovation that facilitates broader deployment. Overall, the findings demonstrate that regional climate policies can induce widespread asset reallocation that extends well beyond the boundaries of regulated areas.
