Carbon Pricing, Credit Reallocation and Real Effects

Abstract

We show that carbon-price shocks affect firms’ investment and emission-intensity via a debt-channel. Our identification exploits a reform-driven carbon-price surge in the EU Emission Trading System (EU-ETS) and loan-level credit registry data for Italy. Highly-exposed ETS-firms increase their demand for term-loans to finance new investment. The resulting jump in firm activity is not associated with higher carbon emissions, thereby reducing firms’ emission-intensity. Crucially, both the debt-channel and the abatement in emission-intensity are significant only among firms eventually undertaking green investments. Moreover, higher credit demand by exposed ETS-firms crowd-out creditsupply to other (non-ETS) firms in brown sectors.

Keywords: Carbon Pricing, Climate Finance, Credit, Real Effects, Carbon Emissions

JEL Classification: G1, G21, G31, Q5