Stranded Asset Risk in the Bond Market

Asset stranding involves permanently shutting down productive but harmful facilities that impose negative externalities on society. Because bonds are a major source of funding for corporations, investors such as pension funds and insurance companies seeking to reduce their exposure to asset stranding have the potential to limit the supply of capital to polluting firms by divesting their holdings of the polluting firms’ bonds. We examine the implications of stranded asset risk for polluting firms regulated under the Clean Air Act (CAA). Polluting facilities located in counties in violation of the CAA are required to comply with the act’s provisions regardless of cost, leading to a contraction in capital for companies with facilities located in affected counties. More broadly, this study contributes to our understanding of whether and how pollution externalities affect private-sector capital supply to polluting firms.