Financially Constrained Carbon Management

Abstract

We develop a model studying how financing frictions affect a firm's carbon footprint as well as its transition to sustainable technologies while allowing for multiple types of green investment: abatement of carbon emissions, adoption of available technologies, and green innovation. Financing frictions impact each type of green investment differently---with abatement unaffected, a negative effect on adoption, and an ambiguous impact on green innovation. Financing frictions reduce current emissions by contracting production, but have a negative impact on the transition to greener technologies in firms relying mainly on adoption. We further show tilting strategies need not boost green innovation, exclusion strategies mainly curb current emissions, and subsidies to adoption help incentivize green innovation too.

Keywords: Carbon emissions; green investment; green transition; financing frictions

JEL Classification: D62; G31; G32; O31