The Preferential Treatment of Green Bonds

Francesco Giovanardi, Matthias Kaldorf, Lucas Radke (radke@wiso.uni-koeln.de) and Florian Wicknig (fwicknig@wiso.uni-koeln.de)
Additional contact information
Lucas Radke: University of Cologne
Florian Wicknig: University of Cologne

No 98, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We study the preferential treatment of green bonds in the central bank collateral framework as an environmental policy instrument within a DSGE model with environmental and financial frictions. Green and conventional firms issue corporate bonds to banks that use them as collateral. The associated collateral premium induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green in-vestment. Due to these adverse effects, optimal collateral policy is characterized by modest preferential treatment, thereby increasing the green bond share and, to a smaller extent, the green investment share, which reduces pollution. The limited response of green investment is directly related to higher risk-taking of green firms. Furthermore, we show that preferential treatment is an imperfect substitute of Pigouvian taxation on pollution: only if the optimal tax can not be implemented, optimal collateral policy features preferential treatment of green bonds.

Keywords: Green Investment; Collateral Framework; Environmental Policy (search for similar items in EconPapers)
JEL-codes: E44 E58 E63 Q58 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2021-10
New Economics Papers: this item is included in nep-cba, nep-ene, nep-env, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_098_2021.pdf Third version, 2021 (application/pdf)

Related works:
Journal Article: The Preferential Treatment of Green Bonds (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:098

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