IDEAS home Printed from https://ideas.repec.org/p/osf/osfxxx/ds7bx.html
   My bibliography  Save this paper

Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation

Author

Listed:
  • Döttling, Robin
  • Rola-Janicka, Magdalena

Abstract

We analyze jointly optimal carbon pricing and financial policies under financial constraints and endogenous climate-related transition and physical risks. The socially optimal emissions tax may be above or below a Pigouvian benchmark, depending on whether physical climate risks have a substantial impact on collateral values. We derive necessary conditions for emissions taxes alone to implement a constrained-efficient allocation, and show a cap-and-trade system or green subsidies may dominate emissions taxes because they can be designed to have a less adverse effect on financial constraints. Additionally introducing leverage regulation can be welfare-improving if environmental policies have a direct negative effect on financial constraints. Furthermore, our analysis highlights the positive effect of carbon price hedging markets on equilibrium environmental policies.

Suggested Citation

  • Döttling, Robin & Rola-Janicka, Magdalena, 2023. "Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation," OSF Preprints ds7bx, Center for Open Science.
    • Handle: RePEc:osf:osfxxx:ds7bx
    DOI: 10.31219/osf.io/ds7bx
    as

    Download full text from publisher

    File URL: https://osf.io/download/64a01be1a2a2f410a0436765/
    Download Restriction: no
    File URL: https://libkey.io/10.31219/osf.io/ds7bx?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eduardo Dávila & Ansgar Walther, 2021. "Corrective Regulation with Imperfect Instruments," NBER Working Papers 29160, National Bureau of Economic Research, Inc.
    2. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    3. Edith Ginglinger & Quentin Moreau, 2023. "Climate Risk and Capital Structure," Management Science, INFORMS, vol. 69(12), pages 7492-7516, December.
    4. Florian Hoffmann & Roman Inderst & Ulf Moslener, 2017. "Taxing Externalities Under Financing Constraints," Economic Journal, Royal Economic Society, vol. 127(606), pages 2478-2503, November.
    5. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    6. Rampini, Adriano A. & Viswanathan, S., 2013. "Collateral and capital structure," Journal of Financial Economics, Elsevier, vol. 109(2), pages 466-492.
    7. Dafermos, Yannis & Nikolaidi, Maria & Galanis, Giorgos, 2018. "Climate Change, Financial Stability and Monetary Policy," Ecological Economics, Elsevier, vol. 152(C), pages 219-234.
    8. Bolton, Patrick & Kacperczyk, Marcin, 2021. "Do investors care about carbon risk?," Journal of Financial Economics, Elsevier, vol. 142(2), pages 517-549.
    9. William Nordhaus, 2018. "Projections and Uncertainties about Climate Change in an Era of Minimal Climate Policies," American Economic Journal: Economic Policy, American Economic Association, vol. 10(3), pages 333-360, August.
    10. Heider, Florian & Inderst, Roman, 2021. "A Corporate Finance Perspective on Environmental Policy," EconStor Preprints 253669, ZBW - Leibniz Information Centre for Economics.
    11. Haavio, Markus & Kotakorpi, Kaisa, 2011. "The political economy of sin taxes," European Economic Review, Elsevier, vol. 55(4), pages 575-594, May.
    12. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    13. Jean Tirole, 2010. "From Pigou to Extended Liability: On the Optimal Taxation of Externalities Under Imperfect Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 697-729.
    14. David Martinez-Miera & Rafael Repullo, 2010. "Does Competition Reduce the Risk of Bank Failure?," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3638-3664, October.
    15. Lee, Dwight R. & Misiolek, Walter S., 1986. "Substituting pollution taxation for general taxation: Some implications for efficiency in pollutions taxation," Journal of Environmental Economics and Management, Elsevier, vol. 13(4), pages 338-347, December.
    16. Bovenberg, A. Lans & Goulder, Lawrence H., 1997. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes: General Equilibrium Analyses," National Tax Journal, National Tax Association;National Tax Journal, vol. 50(1), pages 59-88, March.
    17. Lans Bovenberg, A. & de Mooij, Ruud A., 1997. "Environmental tax reform and endogenous growth," Journal of Public Economics, Elsevier, vol. 63(2), pages 207-237, January.
    18. Peter A. Diamond, 1973. "Consumption Externalities and Imperfect Corrective Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 526-538, Autumn.
    19. Eduardo Dávila & Anton Korinek, 2018. "Pecuniary Externalities in Economies with Financial Frictions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 352-395.
    20. Guido Lorenzoni, 2008. "Inefficient Credit Booms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 809-833.
    21. Florian Hoffmann & Roman Inderst & Ulf Moslener, 2017. "Taxing Externalities Under Financing Constraints," Economic Journal, Royal Economic Society, vol. 127(606), pages 2478-2503, November.
    22. Itay Goldstein & Alexandr Kopytov & Lin Shen & Haotian Xiang, 2022. "On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices," NBER Working Papers 29839, National Bureau of Economic Research, Inc.
    23. Francesca Diluiso & Barbara Annicchiarico & Matthias Kalkuhl & Jan C. Minx, 2020. "Climate Actions and Stranded Assets: The Role of Financial Regulation and Monetary Policy," CEIS Research Paper 501, Tor Vergata University, CEIS, revised 22 Jul 2020.
    24. Ferrari, Alessandro & Nispi Landi, Valerio, 2024. "Whatever it takes to save the planet? Central banks and unconventional green policy," Macroeconomic Dynamics, Cambridge University Press, vol. 28(2), pages 299-324, March.
    25. Stefano Giglio & Matteo Maggiori & Krishna Rao & Johannes Stroebel & Andreas Weber & Stijn Van Nieuwerburgh, 2021. "Climate Change and Long-Run Discount Rates: Evidence from Real Estate [Abrupt climate change]," The Review of Financial Studies, Society for Financial Studies, vol. 34(8), pages 3527-3571.
    26. Saleem Bahaj & Frederic Malherbe, 2020. "The Forced Safety Effect: How Higher Capital Requirements Can Increase Bank Lending," Journal of Finance, American Finance Association, vol. 75(6), pages 3013-3053, December.
    27. Bovenberg, A. Lans & Goulder, Lawrence H., 1997. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes: General Equilibrium Analyses," National Tax Journal, National Tax Association, vol. 50(1), pages 59-88, March.
    28. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    29. Philipp Krueger & Zacharias Sautner & Laura T Starks, 2020. "The Importance of Climate Risks for Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1067-1111.
    30. William Nordhaus, 2019. "Climate Change: The Ultimate Challenge for Economics," American Economic Review, American Economic Association, vol. 109(6), pages 1991-2014, June.
    31. Qiping Xu & Taehyun Kim, 2022. "Financial Constraints and Corporate Environmental Policies," The Review of Financial Studies, Society for Financial Studies, vol. 35(2), pages 576-635.
    32. Stefano Carattini & Garth Heutel & Givi Melkadze, 2023. "Climate Policy, Financial Frictions, and Transition Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 778-794, December.
    33. Alogoskoufis, Spyros & Dunz, Nepomuk & Emambakhsh, Tina & Hennig, Tristan & Kaijser, Michiel & Kouratzoglou, Charalampos & Muñoz, Manuel A. & Parisi, Laura & Salleo, Carmelo, 2021. "ECB’s economy-wide climate stress test," Occasional Paper Series 281, European Central Bank.
    34. Lint Barrage, 2020. "Optimal Dynamic Carbon Taxes in a Climate–Economy Model with Distortionary Fiscal Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 1-39.
    35. Clò, Stefano, 2010. "Grandfathering, auctioning and Carbon Leakage: Assessing the inconsistencies of the new ETS Directive," Energy Policy, Elsevier, vol. 38(5), pages 2420-2430, May.
    36. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christian Haas & Karol Kempa, 2023. "Low-Carbon Investment and Credit Rationing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 86(1), pages 109-145, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Drudi, Francesco & Moench, Emanuel & Holthausen, Cornelia & Weber, Pierre-François & Ferrucci, Gianluigi & Setzer, Ralph & Adao, Bernardino & Dées, Stéphane & Alogoskoufis, Spyros & Téllez, Mar Delgad, 2021. "Climate change and monetary policy in the euro area," Occasional Paper Series 271, European Central Bank.
    2. Breckenfelder, Johannes & Maćkowiak, Bartosz & Marqués-Ibáñez, David & Olovsson, Conny & Popov, Alexander & Porcellacchia, Davide & Schepens, Glenn, 2023. "The climate and the economy," Working Paper Series 2793, European Central Bank.
    3. Christian Haas & Karol Kempa, 2023. "Low-Carbon Investment and Credit Rationing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 86(1), pages 109-145, October.
    4. Ströbel, Johannes & Wurgler, Jeffrey, 2021. "What do you think about climate finance?," CEPR Discussion Papers 16622, C.E.P.R. Discussion Papers.
    5. Barbara Annicchiarico & Stefano Carattini & Carolyn Fischer & Garth Heutel, 2022. "Business Cycles and Environmental Policy: A Primer," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 3(1), pages 221-253.
    6. 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).
    7. Bovenberg, A. Lans & Goulder, Lawrence H., 2002. "Environmental taxation and regulation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 23, pages 1471-1545, Elsevier.
    8. Roy Kouwenberg & Chenglong Zheng, 2023. "A Review of the Global Climate Finance Literature," Sustainability, MDPI, vol. 15(2), pages 1-32, January.
    9. Martinsson, Gustav & Sajtos, László & Strömberg, Per & Thomann, Christian, 2022. "Carbon Pricing and Firm-Level CO2 Abatement: Evidence from a Quarter of a Century-Long Panel," Misum Working Paper Series 2022-10, Stockholm School of Economics, Mistra Center for Sustainable Markets (Misum).
    10. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2022. "Dissecting green returns," Journal of Financial Economics, Elsevier, vol. 146(2), pages 403-424.
    11. Giovanardi, Francesco & Kaldorf, Matthias, 2024. "Climate change and the macroeconomics of bank capital regulation," Discussion Papers 13/2024, Deutsche Bundesbank.
    12. Aronsson, Thomas & Sjögren, Tomas, 2018. "Optimal Taxation, Redistribution, and Environmental Externalities," International Review of Environmental and Resource Economics, now publishers, vol. 11(3), pages 233-308, August.
    13. Reghezza, Alessio & Altunbas, Yener & Marques-Ibanez, David & Rodriguez d’Acri, Costanza & Spaggiari, Martina, 2022. "Do banks fuel climate change?," Journal of Financial Stability, Elsevier, vol. 62(C).
    14. Ferentinos, Konstantinos & Gibberd, Alex & Guin, Benjamin, 2023. "Stranded houses? The price effect of a minimum energy efficiency standard," Energy Economics, Elsevier, vol. 120(C).
    15. Kogler, Michael, 2020. "Risk shifting and the allocation of capital: A Rationale for macroprudential regulation," Journal of Banking & Finance, Elsevier, vol. 118(C).
    16. Ugolini, Andrea & Reboredo, Juan C. & Ojea-Ferreiro, Javier, 2024. "Is climate transition risk priced into corporate credit risk? Evidence from credit default swaps," Research in International Business and Finance, Elsevier, vol. 70(PB).
    17. Opp, Marcus & Oehmke, Martin, 2020. "A theory of socially responsible investment," CEPR Discussion Papers 14351, C.E.P.R. Discussion Papers.
    18. Mireille Chiroleu-Assouline, 2001. "Le double dividende. Les approches théoriques," Revue Française d'Économie, Programme National Persée, vol. 16(2), pages 119-147.

    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:osf:osfxxx:ds7bx. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: OSF (email available below). General contact details of provider: https://osf.io/preprints/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.