Low-Carbon Investment and Credit Rationing

Christian Haas and Karol Kempa
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Christian Haas: Frankfurt School of Finance & Management

Environmental & Resource Economics, 2023, vol. 86, issue 1, No 5, 109-145

Abstract: Abstract 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.

Keywords: Asymmetric information; Credit rationing; Emission tax; Interest rate subsidy; Loan guarantee; Low-carbon investment (search for similar items in EconPapers)
JEL-codes: G20 H23 H81 Q50 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10640-023-00789-z

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