Incentivizing Investors for a Greener Economy

54 Pages Posted: 18 Oct 2021 Last revised: 28 Mar 2022

See all articles by Nam Nguyen

Nam Nguyen

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Alejandro Rivera

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Harold H. Zhang

University of Texas at Dallas - Naveen Jindal School of Management; China Academy of Financial Research (CAFR)

Date Written: October 17, 2021

Abstract

We propose the use of investment income taxes to incentivize investors to reallocate capital to the eco-friendly green sector away from the non-eco-friendly brown sector to reduce the climate change disaster which obliterates a fraction of capital in the economy. Compared with a Carbon tax on firms, investment income tax directly affects investors’ net returns and their capital allocation decision. Climate change disaster follows a Poisson process with intensity increasing in the fraction of capital allocated to the brown sector. The laissez-faire equilibrium is not Pareto efficient and brown (green) firms over-invest (under-invest) relative to the social optimum. We show that investment income tax can deliver the socially optimal allocation as effectively as the carbon tax, thus offer an additional policy tool to achieve a greener economy and reduce the climate change disaster risk.

Keywords: Climate change, investment income taxes, dynamic taxation, ESG investing

JEL Classification: G00, G30, Q54

Suggested Citation

Nguyen, Nam and Rivera, Alejandro and Zhang, Harold Huibing, Incentivizing Investors for a Greener Economy (October 17, 2021). Available at SSRN: https://ssrn.com/abstract=3944305 or http://dx.doi.org/10.2139/ssrn.3944305

Nam Nguyen

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

Alejandro Rivera (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

HOME PAGE: http://jindal.utdallas.edu/faculty/alejandro-rivera

Harold Huibing Zhang

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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