Incentivizing Investors for a Greener Economy

Nam Nguyen, Alejandro Rivera and Harold H. Zhang

Journal of Financial and Quantitative Analysis, 2025, vol. 60, issue 1, 406-446

Abstract: We demonstrate that investment income taxes incentivize capital allocation to the ecofriendly green sector away from the non-ecofriendly brown sector in a stylized economy. This tax reduces the arrival intensity of climate disasters, delivers the socially optimal allocation, and can be jointly implemented with a carbon tax, expanding policymakers’ toolkit to reduce climate disasters. Extending the model with heterogeneous investors, we show that investment income taxes can obtain support from a political majority and thereby relax political constraints faced by a carbon tax alone.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:60:y:2025:i:1:p:406-446_12

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