Financing the transformation: a proposal for a credit scheme to finance the Paris Agreement

To achieve the goals of the Paris Agreement, massive investments in the real economy are needed. We propose providing long-term interest subsidized loans to companies investing in sustainable projects with the primary goal of greenhouse gas neutrality. In detail, we propose linking loan interest rates to the EU Taxonomy and to future CO2 prices. These links incentivize companies to decarbonize. Furthermore, this link can hedge companies against volatile CO2 prices and incentivizes companies to make their business models more sustainable. Both elements support the transformation process of the economy.Key policy insights By linking an interest rate discount to the investment’s alignment with the EU Taxonomy, companies are incentivized to invest climate-friendly even at low CO2 prices.By coupling the interest rates to future CO2 prices, the loans act as a hedge, which helps emission reducing activities when they need it the most.Additionally, these loans set incentives for companies to disclose their alignment with the EU Taxonomy and signal their exposure to CO2 price risk, while helping governments to commit to their policy goals.