The Preferential Treatment of Green Bonds

ECONtribute Discussion Paper No. 098/2021

47 Pages Posted: 10 May 2021 Last revised: 4 May 2022

See all articles by Francesco Giovanardi

Francesco Giovanardi

University of Cologne

Matthias Kaldorf

University of Cologne

Lucas Radke

University of Cologne

Florian Wicknig

University of Cologne; 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. Green and conventional firms issue corporate bonds to banks that use them as collateral. The associated collateral premium 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. Due to these adverse effects, optimal collateral policy is characterized by modest preferential treatment, thereby increasing the green bond share and, to a smaller extent, the green investment share, which reduces pollution. The limited response of green investment is directly related to higher risk-taking of green firms. Furthermore, we show that preferential treatment is an imperfect substitute of Pigouvian taxation on pollution: only if the optimal tax can not be implemented, optimal collateral policy features 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, Lucas and Wicknig, Florian, The Preferential Treatment of Green Bonds (May 7, 2021). ECONtribute Discussion Paper No. 098/2021, 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)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Lucas Radke

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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

Florian Wicknig

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://sites.google.com/view/florianwicknig/home

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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