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The Preferential Treatment of Green Bonds

Author

Listed:
  • Francesco Giovanardi

    (University of Cologne)

  • Matthias Kaldorf

    (University of Cologne, Center for Macroeconomic Research. Sibille-Hartmann-Str. 2-8, 50969 Cologne, Germany)

  • Lucas Radke

    (University of Cologne)

  • Florian Wicknig

    (University of Cologne)

Abstract

We study the preferential treatment of green bonds in the central bank collateral framework as an environmental policy instrument within a DSGE model with environmental and financial frictions. Green and conventional firms issue corporate bonds to banks that use them as collateral. The associated collateral premium induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green in-vestment. Due to these adverse effects, optimal collateral policy is characterized by modest preferential treatment, thereby increasing the green bond share and, to a smaller extent, the green investment share, which reduces pollution. The limited response of green investment is directly related to higher risk-taking of green firms. Furthermore, we show that preferential treatment is an imperfect substitute of Pigouvian taxation on pollution: only if the optimal tax can not be implemented, optimal collateral policy features preferential treatment of green bonds.

Suggested Citation

  • Francesco Giovanardi & Matthias Kaldorf & Lucas Radke & Florian Wicknig, 2021. "The Preferential Treatment of Green Bonds," ECONtribute Discussion Papers Series 098, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:098
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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. Alessandro Ferrari & Valerio Nispi Landi, 2023. "Toward a Green Economy: The Role of the Central Bank’s Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 19(5), pages 287-340, December.
    3. Abiry, Raphael & Ferdinandusse, Marien & Ludwig, Alexander & Nerlich, Carolin, 2022. "Climate change mitigation: How effective is green quantitative easing?," ZEW Discussion Papers 22-027, ZEW - Leibniz Centre for European Economic Research.
    4. Mertzanis, Charilaos, 2024. "Central bank policies and green bond issuance on a global scale," Energy Economics, Elsevier, vol. 133(C).
    5. Patrick Gruning, 2022. "Fiscal, Environmental, and Bank Regulation Policies in a Small Open Economy for the Green Transition," Working Papers 2022/06, Latvijas Banka.
    6. Punzi, Maria Teresa, 2024. "The role of macroprudential policies under carbon pricing," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 858-875.
    7. Diluiso, Francesca & Annicchiarico, Barbara & Kalkuhl, Matthias & Minx, Jan C., 2021. "Climate actions and macro-financial stability: The role of central banks," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    8. Döttling, Robin & Lam, Adrian, 2023. "Does Monetary Policy Shape the Path to Carbon Neutrality?," OSF Preprints kqdar, Center for Open Science.
    9. Le, Anh H. & Uddin, Gazi Salah & Lucey, Brian, 2024. "Green targeted lending operations in the Euro Area," Economics Letters, Elsevier, vol. 243(C).

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    More about this item

    Keywords

    Green Investment; Collateral Framework; Environmental Policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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