Green Loans And Household Behavior: Selection, Real Effects, And Windfalls

Financial markets are increasingly seen as pivotal in mitigating climate change by influencing consumer choices. This paper studies the introduction of a green loan program in Iceland that offers an interest rate rebate for electric vehicle (EV) purchases, and analyzes who selects these loans and how adopting an electric car affects household finances. Using transaction-level data from a large Icelandic bank, we compare green car loan takers to regular car loan takers. We find that green loan adopters tend to be more affluent, have larger families, live in areas with strong Green Party support, and are more financially literate and more likely to have previously invested in green bonds, indicating both pro-environment and financial-awareness channels in selection. They also exhibit different pre-purchase consumption patterns (e.g., lower spending on gasoline and higher spending on other carbon-intensive goods) even before switching to an EV. After the purchase, green loan households dramatically reduce gasoline expenditures (about 30% on average) while increasing electricity costs modestly (around 13%), resulting in a net decline in monthly car-related outlays of roughly 10,000 ISK (≈$77). This corresponds to a 0.8 percentage point drop in the household’s energy-expenditure-to-income ratio and implies sizable reductions in fuel-related CO2 emissions. We further show that exogenous liquidity windfalls significantly increase the likelihood of choosing a green car loan: lottery winners who subsequently buy a car are 12-13 percentage points more likely to opt for an EV. However, because current green loan take-up is heavily skewed toward wealthier, already green consumers, the aggregate carbon reductions remain limited. Our findings suggest that green loan programs can both cut carbon emissions and save consumers money, but only if complemented by policies to broaden access beyond the environmentally motivated and financially well-off.