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

63 Pages Posted: 29 Jul 2020 Last revised: 2 Jun 2021

See all articles by Ivan Ivanov

Ivan Ivanov

Board of Governors of the Federal Reserve System

Mathias S. Kruttli

Board of Governors of the Federal Reserve System; University of Oxford - Oxford-Man Institute of Quantitative Finance

Sumudu W. Watugala

Cornell University - SC Johnson College of Business

Date Written: June 1, 2021

Abstract

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

Ivanov, Ivan and Kruttli, Mathias S. and Watugala, Sumudu W., Banking on Carbon: Corporate Lending and Cap-and-Trade Policy (June 1, 2021). Available at SSRN: https://ssrn.com/abstract=3650447 or http://dx.doi.org/10.2139/ssrn.3650447

Ivan Ivanov

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mathias S. Kruttli

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/mathias-s-kruttli.htm

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

HOME PAGE: http://sites.google.com/site/mathiaskruttli/home

Sumudu W. Watugala (Contact Author)

Cornell University - SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

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