The Preferential Treatment of Green Bonds

55 Pages Posted: 10 May 2021 Last revised: 29 Dec 2022

See all articles by Francesco Giovanardi

Francesco Giovanardi

University of Cologne

Matthias Kaldorf

Deutsche Bundesbank

Lucas Radke-Arden

Deutsche Bundesbank

Florian Wicknig

Deutsche Bundesbank

Date Written: May 7, 2021

Abstract

We study the preferential treatment of green bonds in the central bank collateral framework as an environmental policy instrument within a DSGE model with environmental and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral. The collateral premium associated to a relaxation in collateral policy induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by modest preferential treatment, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal emission taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features a preferential treatment of green bonds.

Keywords: Green Investment, Collateral Framework, Environmental Policy

JEL Classification: E44, E58, E63, Q58

Suggested Citation

Giovanardi, Francesco and Kaldorf, Matthias and Radke-Arden, Lucas and Wicknig, Florian, The Preferential Treatment of Green Bonds (May 7, 2021). Deutsche Bundesbank Discussion Paper No. 51/2022, Available at SSRN: https://ssrn.com/abstract=3841616 or http://dx.doi.org/10.2139/ssrn.3841616

Francesco Giovanardi

University of Cologne ( email )

Cologne
Germany

Matthias Kaldorf (Contact Author)

Deutsche Bundesbank ( email )

Lucas Radke-Arden

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

HOME PAGE: http://https://sites.google.com/view/lucasradke/home

Florian Wicknig

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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