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Environmental Taxation and Financial Frictions in Green Lending

Author

Listed:
  • Joshua Greubel
  • Fabian Herweg

Abstract

We study polluting firms that require loans from a monopolistic bank to invest in abatement technology. Firms differ in the effectiveness of abatement investment, and this effectiveness is private information. The bank offers a screening contract under which high-cost firms receive too little capital and therefore emit excessively. A regulator restricted to tax policy responds by setting an environmental tax above marginal environmental damage, i.e., above the Pigouvian level. The first-best allocation can be restored by combining the Pigouvian tax, which ensures efficient abatement, with tailored, type-specific loan subsidies that correct the credit-market distortion.

Suggested Citation

  • Joshua Greubel & Fabian Herweg, 2026. "Environmental Taxation and Financial Frictions in Green Lending," CESifo Working Paper Series 12828, CESifo.
    • Handle: RePEc:ces:ceswps:_12828
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    File URL: https://www.ifo.de/DocDL/cesifo1_wp12828.pdf
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    More about this item

    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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