Banking on Carbon: Corporate Lending and Cap-and-Trade Policy
63 Pages Posted: 29 Jul 2020 Last revised: 2 Jun 2021
Date Written: June 1, 2021
We estimate the effect of carbon pricing policy on bank credit to firms with greenhouse gas emissions. Our analyses exploit the geographic restrictions inherent in the California cap-and-trade bill and a discontinuity in the embedded free-permit threshold of the federal Waxman-Markey cap-and-trade bill. Affected high-emission firms face shorter loan maturities, lower access to permanent forms of bank financing, higher interest rates, and higher participation of shadow banks in their lending syndicates. These effects are concentrated among private firms, suggesting banks are less concerned about the policies' impact on public firms. Overall, banks quickly mitigate their exposure to climate transition risks.
Keywords: bank lending, greenhouse gas emissions, cap-and-trade policy, climate finance
JEL Classification: G20, G21, G28
Suggested Citation: Suggested Citation