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The preferential treatment of green bonds

Author

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  • Giovanardi, Francesco
  • Kaldorf, Matthias
  • Radke, Lucas
  • Wicknig, Florian

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. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral. The collateral premium associated to a relaxation in collateral policy 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 investment. Optimal collateral policy is characterized by modest preferential treatment, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal emission taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features preferential treatment of green bonds.

Suggested Citation

  • Giovanardi, Francesco & Kaldorf, Matthias & Radke, Lucas & Wicknig, Florian, 2022. "The preferential treatment of green bonds," Discussion Papers 51/2022, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:512022
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    References listed on IDEAS

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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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