Banking on Carbon: Corporate Lending and Cap-and-Trade Policy

The Review of Financial Studies, Volume 37, Issue 5, May 2024, Pages 1640–1684

63 Pages Posted: 29 Jul 2020 Last revised: 16 Aug 2023

See all articles by Ivan Ivanov

Ivan Ivanov

Federal Reserve Bank of Chicago

Mathias S. Kruttli

Kelley Business School - Indiana University

Sumudu W. Watugala

Indiana University - Kelley School of Business - Department of Finance

Date Written: June 30, 2023

Abstract

We estimate the effect of carbon pricing policy on bank credit to greenhouse gas emitting firms. Our analyses exploit the geographic restrictions inherent in California's 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, while credit terms of public firms are largely unaffected. Overall, we show that banks respond quickly to realizations of transition risk.

Keywords: bank lending, greenhouse gas emissions, cap-and-trade policy, transition risk, climate finance

JEL Classification: G20, G21, G28

Suggested Citation

Ivanov, Ivan and Kruttli, Mathias S. and Watugala, Sumudu W., Banking on Carbon: Corporate Lending and Cap-and-Trade Policy (June 30, 2023). The Review of Financial Studies, Volume 37, Issue 5, May 2024, Pages 1640–1684, Available at SSRN: https://ssrn.com/abstract=3650447 or http://dx.doi.org/10.2139/ssrn.3650447

Ivan Ivanov

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://ivantivanov.com

Mathias S. Kruttli

Kelley Business School - Indiana University ( email )

Bloomington, IN 47405
United States

Sumudu W. Watugala (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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