To achieve decarbonization goals, electric utilities are being asked to make large capital investments in generation and transmission infrastructure during a time of heightened policy uncertainty. A growing body of empirical research finds economic and environmental policy uncertainty deters investment. In these studies, policy uncertainty is measured as the number of newspaper articles that reference chosen uncertainty-related keywords. Unfortunately, these popular policy uncertainty metrics are unable to distinguish between increases in policy risk (i.e., volatility in the amount of policy activity) and Knightian uncertainty (i.e., ambiguity). Charles shows that the common negative relationship between policy uncertainty and investment may be reversed if policy uncertainty is instead defined as policy risk. He constructs a monthly measure of electric utility-specific policy activity using counts of newspaper articles that discuss electric utility-relevant policy between 1985-2022. He then shows that increases in volatility over policy activity correspond to an increase in utility investment rather than a decrease. Using a model based on real options theory, he shows that this counter-intuitive result depends on whether the policy activity is associated with a carrot (e.g. renewable subsidies and rebates) or a stick (e.g., carbon tax, cap and trade). These results illustrate how uncertainty can spur investment and highlight an additional dimension of the long-debated merits of taxes versus subsidies.
Bio: Charles Sims, TVA Distinguished Professor of Energy and Environmental Policy at The University of Tennessee - Knoxville, will visit Penn State on September 3-4. Charles’s research centers on environmental and natural resource economics with an emphasis on the role of risk and uncertainty in natural resource, environmental, and energy policy. His past research has investigated issues related to renewable energy adoption, climate change mitigation and adaptation, invasive and endangered species, forest management, and infectious diseases. He is the Director of the Center for Energy, Transportation and Environmental Policy (CETEP) at UT Knoxville, and is a co-editor of Resource and Energy Economics.