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Sustainable finance and climate change: Wasteful but a political commitment device?

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  • Fuest, Clemens
  • Meier, Volker

Abstract

Promoting investment in low carbon “clean” sectors has gained popularity over the last years under the heading of sustainable finance, at the same time raising concerns about adverse welfare effects of such policies. We analyze the political economy of subsidizing investment in “clean” industries in a stylized two-sector small open economy model with irreversible investment and reelection risks. We show that sustainable finance has a welfare cost if more targeted climate policy instruments are available. However, sustainable finance may be used by incumbent governments as an instrument to influence environmental policy decisions of future governments, which may have different preferences. Our model also offers an explanation for the political polarization about sustainable finance and climate policy currently observed in the United States.

Suggested Citation

  • Fuest, Clemens & Meier, Volker, 2023. "Sustainable finance and climate change: Wasteful but a political commitment device?," Journal of Environmental Economics and Management, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:jeeman:v:118:y:2023:i:c:s009506962300013x
    DOI: 10.1016/j.jeem.2023.102795
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    Cited by:

    1. Giovanardi, Francesco & Kaldorf, Matthias, 2024. "Climate change and the macroeconomics of bank capital regulation," Discussion Papers 13/2024, Deutsche Bundesbank.
    2. Irene Monasterolo & Antonia Pacelli & Marco Pagano & Carmine Russo, 2024. "A European Climate Bond," CSEF Working Papers 702, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    3. Fuest Clemens & Meier Volker, 2022. "Green Finance and the EU-Taxonomy for Sustainable Activities: Why Using More Direct Environmental Policy Tools Is Preferable," The Economists' Voice, De Gruyter, vol. 19(2), pages 261-266, December.

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    More about this item

    Keywords

    Climate change; Global externalities; Sustainable finance; Small open economy; Political economy;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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