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2021 Graduation Stories: Thesis on Environmental Policy and Financial Markets Wins Award

May 4, 2021

by Jackie Ogburn

smiling young womanSophia Katz PPS’21 grew up on the Upper West Side of New York City, where financial news was part of the atmosphere.

She wanted to live somewhere different for a while and take a break from the scale and pace of the city. “I fell in love with Durham when I first saw it,” she said.

Katz decided to major in public policy after taking PubPol 155. “I realized that the things that I was most interested in, ethics, economics, environment and writing were all part of public policy,” she said. “It’s a skill-building major and the best Duke has to offer in interdisciplinary studies.”

She combined her interests in markets and environmental policy in her thesis, Wasted Energy: Re-Directing Investment into Renewables through Environmental Policy, which received the Best Honors Thesis Award from the Sanford School of Public Policy.

The Clean Power Plan (CPP) created by the Obama administration sought to move energy generation away from coal and into investing in renewable energy on a wide scale. It was the first ever regulation to limit carbon dioxide emission from both new and existing power plants. It was also denounced by some for its detrimental impact on the U.S. coal industry, and along with other policies, led to criticism that the administration was waging a “War on Coal.”

“I was curious about whether markets respond to specific policy,” she said. The CPP provided a clear case of a specific event and with defined markets, with indices from both the “green” renewable energy industry and “brown” coal and mining industry to examine and compare with exchange traded funds indices.

"I wanted to know if the CPP changed energy investors’ mindsets,” she said.

Katz did a market event study, looking at the changes in these indices in the 100-day trading window surrounding both the proposal of the plan on June 2, 2014 and the final announcement on August 3, 2015.

She also did an analysis of the news about the plan leading up to the announcement date.  In the 10 days before the announcement of the proposal, newspapers and media with worldwide readership cover the CPP, including its implications and points of contention.

In the summer of 2014, the coal industry began to fight the proposal in court in Murray Energy v. EPA and through an advertising campaign of “clean coal,” that was misleading.

“I was surprised at the misinformation pushed by the coal companies. It was right there in the bankruptcy filings,” Katz said. The companies funded nuisance suits and climate denial agencies, such as the American Legislative Exchange Council, which fights clean energy standards, and the State Policy Network, which tries to block climate bills and repeal EPA rules.

“It was clear that the coal companies would do anything and everything to protect their profits,” Katz said.

Between the proposed regulation and the final announcement, at least four major coal companies went bankrupt, and the coal indices lost up to 75 percent of their value. Her findings suggest that institutional investors were not responsive to the coal companies’ tactics of disinformation.

In her conclusion, Katz wrote, ”Results indicated that the CPP’s proposal did provide a shock to the market and produced positive abnormal returns for RE (renewable energy) indices and negative abnormal returns for coal, while the finalized legislation did not as effectively direct capital away from coal equities.”

Faculty advice

Two professors advised Katz on her honors thesis: Dirk Philipsen, associate research professor of economic history and her honors seminar director, and her faculty advisor, Christopher Timmins, professor of economics and environmental sciences and policy.

“Sophia conducted a persuasive analysis of how capital markets perceived the CPP rule and what its likely impact would be,” said Timmins.

“She carried out an event study of the announcement of the rule -- when markets learned of the details and incorporated them into their expected profitability of "green" and "brown" firms, re-allocating their capital investments accordingly. This is a tried-and-true approach to policy analysis, but is not simple to implement correctly. Sophia mastered these methods and backed them up by learning a suite of required econometric techniques,” he said.

“Professor Timmins really helped me with the math and the economics of the thesis,” Katz said. “I really appreciated that he took on a public policy student, someone outside his department, and devoted so many hours to me.” 

“In the end, her analysis was convincing,” said Timmins. “Environmental policies like these can have tangible effects on the flow of investment capital and, subsequently, the output of carbon from our economy.”

As her honors seminar director, Philipsen played a different role. “He provided me a different lens to look at markets,” she said.

“I also appreciated that he challenged me to really think about why I was writing a thesis and what did I want to say.”

He made her realize that you have to be committed to write a thesis. “I loved searching for an answer and I found that markets do respond to policy,” she said.

“Sophia never quit until she had a good answer,” said Philipsen. “What made her work even more remarkable, however, was the way she managed to make something very technical accessible to a broader audience who cares about our necessary transition from fossil to renewable."

Katz worked as an analyst at the investment firm Blackstone during her junior year and has a full-time position there after graduation.