Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation

53 Pages Posted: 3 Feb 2022 Last revised: 23 Feb 2023

See all articles by Robin Döttling

Robin Döttling

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Magdalena Rola-janicka

Tilburg University

Date Written: February 23, 2023

Abstract

We analyze jointly optimal carbon pricing and leverage regulation in a model with financial constraints and endogenous climate-related transition and physical risks. The socially optimal emissions tax is below the Pigouvian benchmark (equal to the direct social cost of emissions) when emissions taxes amplify financial constraints, or above this benchmark if physical climate risks have a substantial impact on collateral values. Additionally introducing leverage regulation can be welfare-improving only if tax rebates are not fully pledgeable. A cap-and-trade system or abatement subsidies may dominate carbon taxes because they can be designed to have a less adverse effect on financial constraints.

Keywords: Pigouvian tax, carbon tax, cap-and-trade, financial constraints, climate risk, financial regulation

JEL Classification: D62, G28, G32, G38, H23

Suggested Citation

Döttling, Robin and Rola-janicka, Magdalena, Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation (February 23, 2023). Available at SSRN: https://ssrn.com/abstract=4024366 or http://dx.doi.org/10.2139/ssrn.4024366

Robin Döttling (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-46
3000 DR Rotterdam, 3000 DR
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Magdalena Rola-janicka

Tilburg University ( email )

P.O. Box 90153
Tilburg, Noord-Brabant 5000 LE
Netherlands

HOME PAGE: http://https://www.magdarolajanicka.com/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
313
Abstract Views
1,174
Rank
150,713
PlumX Metrics