Pollution permits and financing costs

Fabio Antoniou, Manthos Delis (elmanthos@hotmail.com), Steven Ongena and Chris Tsoumas
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Chris Tsoumas: Hellenic Open University

No 20-117, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Effective environmental policy should consider how the financiers of polluting firms behave. In a theoretical model describing the periods before and after policy implementation, we show that loan spreads for firms participating in cap-and-trade programs are a function of the costs of compliance and the specific features of the permits markets. With higher permits storage and lower permit prices, firm financing costs fall. Our empirical analysis exploits the dichotomy created by phase III of the EU Emission Trading System, designed to increase and pass the cost of Carbon dioxide emissions to the polluters. In contrast with possible program intentions but in line with our theoretical predictions, loan spreads fall by 25% on average starting in 2013. We empirically identify permits storage before program implementation and its associated effect as key drivers of the fall in loan spreads for affected firms, and we show that this dynamic partly undermines the expected reduction in Carbon dioxide emissions.

Keywords: Pollution permits; Loan spreads; Bond spreads; EU Emission Trading System; Carbon dioxide emissions (search for similar items in EconPapers)
JEL-codes: G12 G21 Q5 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2020-12
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Pollution permits and financing costs (2020)
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