Adoption of green technology with financial friction

Fabian Herweg

Finance Research Letters, 2025, vol. 71, issue C

Abstract: We investigate firms’ incentives to adopt green technology. To cover the adoption costs, a firm needs a bank loan. The bank cannot observe firms’ adoption costs and offers a loan contract that allows it to earn an intermediation margin. The Pigouvian tax leads to optimal abatement but inefficiently low adoption. The first-best outcome is achieved via a combination of environmental tax and loan subsidy. If the regulator is restricted to an environmental tax, it faces a trade-off between optimal adoption and optimal abatement. In this case, the second-best tax rate exceeds the Pigouvian tax rate.

Keywords: Abatement technology; Financing constraint; Green investment; Pigouvian taxation (search for similar items in EconPapers)
JEL-codes: D21 D25 H23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:71:y:2025:i:c:s154461232401417x

DOI: 10.1016/j.frl.2024.106388

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