Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation

Döttling, Robin; Rola-Janicka, Magdalena

doi:10.2139/ssrn.4442378

SSRN Journal

2023

DOI: 10.2139/ssrn.4442378

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Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation

Robin Döttling

Magdalena Rola-Janicka

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2023

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Low-Carbon Investment and Credit Rationing

Haas

Kempa

2023

Environ Resource Econ

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This paper develops a principal-agent model with adverse selection to analyse firms’ decisions between an existing carbon-intensive technology and a new low-carbon technology requiring an externally funded initial investment. We find that a Pigouvian emission tax alone may result in credit rationing and under-investment in low-carbon technologies. Combining the Pigouvian tax with interest subsidies or loan guarantees resolves credit rationing and yields a first-best outcome. An emission tax set above the Pigouvian level can also resolve credit rationing and, in some cases, yields a first-best outcome. If a carbon price is (politically) not feasible, intervention on the credit market alone can promote low-carbon development. However, such a policy yields a second-best outcome. The issue of credit rationing is temporary if the risks of low-carbon technologies decline. However, there are social costs of delay if credit rationing is not addressed.

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Low-Carbon Investment and Credit Rationing

Haas

Kempa

2023

Environ Resource Econ

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Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation

Cited by 1 publication

References 39 publications

Low-Carbon Investment and Credit Rationing

Low-Carbon Investment and Credit Rationing

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