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Climate Finance Intermediation: Interest Spread Effects in a Climate Policy Model

Kai Lessmann and Matthias Kalkuhl

No 8380, CESifo Working Paper Series from CESifo

Abstract: Interest rates are central determinants of saving and investment decisions. Costly financial intermediation distort these price signals by creating a spread between the interest rates on deposits and loans with substantial effects on the supply of funds and the demand for credit. This study investigates how interest rate spreads affect climate policy in its ambition to shift capital from polluting to low-carbon sectors of the economy. To this end, we introduce financial intermediation costs in a dynamic general equilibrium climate policy model. We find that costly financial intermediation affects carbon emissions in various ways through a number of different channels. For low to moderate interest rate spreads, carbon emissions increase by up to 7 percent, in particular, because of lower investments into the capital intensive clean energy sector. For very high interest rate spreads, emissions fall because lower economic growth reduces carbon emissions. If a certain temperature target should be met, carbon prices have to be adjusted upwards by up to one third under the presence of capital market frictions.

Keywords: financial friction; banking; greenhouse gas mitigation (search for similar items in EconPapers)
JEL-codes: E43 G21 Q54 Q58 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8380

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