Clean Innovation and Heterogeneous Financing Costs

Access to finance is a major barrier to clean innovation. We incorporate a financial sector in a directed technological change model and identify optimal climate policies. The presence of a financing experience effect induces more ambitious policies in the short-term, both to boost clean innovation and production, and to reduce the financing cost differential across technologies. The optimal mix of climate policies (carbon taxes and clean research subsidies) depends on whether experience is gained through production or research. In our benchmark scenario, where clean financing costs decline as cumulative clean output increases, the carbon price premium is 22% in 2025, relative to a case with no financing costs.