Low-Carbon Investment and Credit Rationing

41 Pages Posted: 11 Feb 2020 Last revised: 14 May 2020

See all articles by Christian Haas

Christian Haas

Justus Liebig University Giessen - Department of Economics

Karol Kempa

Frankfurt School of Finance & Management

Date Written: May 13, 2020

Abstract

This paper offers a novel theoretical approach to analyse the impacts of emission externalities and credit market failures on low-carbon investments. We use a principal-agent model with information asymmetries between borrowing firms and lenders. Firms can choose between a carbon-intensive technology and a low-carbon technology requiring an externally funded initial investment. We find that an emission tax alone is not sufficient to achieve the first-best outcome if the low-carbon technology is immature and risky and thus results in credit rationing. Combining the emission tax with interest subsidies or loan guarantees can eliminate credit rationing. 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. Our dynamic analysis shows that any intervention on credit markets is finite, as knowledge spillovers reduce the risk of low-carbon technologies. Without such intervention, there are social costs of delay.

Keywords: low-carbon investment, credit rationing, emission tax, information asymmetry, interest rate subsidy, loan guarantee

JEL Classification: G20, H23, H81, Q50

Suggested Citation

Haas, Christian and Kempa, Karol, Low-Carbon Investment and Credit Rationing (May 13, 2020). Available at SSRN: https://ssrn.com/abstract=3521332 or http://dx.doi.org/10.2139/ssrn.3521332

Christian Haas

Justus Liebig University Giessen - Department of Economics ( email )

Licher Str. 66
Gießen, 35394
Germany

Karol Kempa (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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