GLOBAL DECARBONIZATION INITIATIVES AND RESOURCE ALLOCATIONS IN THE PRIVATE SECTOR

Abstract

Using the abrupt U.S. withdrawal from the Paris Agreement as a shock to global coordination of decarbonization initiatives, we explore how such coordination affects resource allocation. As they receive cheaper debt financing and increase emissions, U.S. firms in polluting industries crowd out neighboring climate-vulnerable firms bearing higher financing costs following the withdrawal. While the bipartisan Climate Alliance framework alleviates these effects in participating states, firms in polluting industries relocate operations to non-participating states. The effect resonates beyond national boundaries: cheaper financing and increasing emissions in polluting industries are observed in countries remaining in the Agreement, especially those with weaker commitments.

Keywords: Paris Agreement, Climate change, Decarbonization, Global Coordination, Cost of Debt, Bank Loans, Reallocation Effect, Externalities

JEL Classification: G21, G28, D61, D62, Q50, Q54, Q58