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Adoption of green technology with financial friction

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  • Herweg, Fabian

Abstract

We investigate firms’ incentives to adopt green technology. To cover the adoption costs, a firm needs a bank loan. The bank cannot observe firms’ adoption costs and offers a loan contract that allows it to earn an intermediation margin. The Pigouvian tax leads to optimal abatement but inefficiently low adoption. The first-best outcome is achieved via a combination of environmental tax and loan subsidy. If the regulator is restricted to an environmental tax, it faces a trade-off between optimal adoption and optimal abatement. In this case, the second-best tax rate exceeds the Pigouvian tax rate.

Suggested Citation

  • Herweg, Fabian, 2025. "Adoption of green technology with financial friction," Finance Research Letters, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finlet:v:71:y:2025:i:c:s154461232401417x
    DOI: 10.1016/j.frl.2024.106388
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    References listed on IDEAS

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    More about this item

    Keywords

    Abatement technology; Financing constraint; Green investment; Pigouvian taxation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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