Carbon Pricing versus Green Finance

Abstract

Economics recommends combating climate change with carbon pricing, but green finance (ESG investing, sustainable finance regulation) is becoming widespread. In a unified model, I show that green finance should not be used if the carbon price equals its social cost. However, with too low carbon prices, green finance can implement the social optimum if the cost of capital can be controlled and there are no stranded assets. I show explicitly how to "translate" a carbon tax into green finance terms, highlight how green finance should depend on scope 1, 2, and 3 emissions, and present its limitations based on the calibrated magnitudes.

Keywords: ESG investing, sustainable finance regulation, carbon allowances, carbon offsets, carbon credits JEL Codes: G1, H23, E44, O44, Q5

JEL Classification: G1, H23, E44, O44, Q5