Effective environmental policy shouldconsider how the financiers of polluting firms behave. In a theoretical model describing the periods before and after policy implementation, we show that loan spreads for firms participating in cap-and-trade programs are a function of the costs of compliance and the specific features of the permits markets. With higher permits storage and lower permit prices, firm financing costs fall.Our empirical analysis exploits the dichotomy created by phase III of the EU Emission Trading System,designed to increaseand pass the cost of CO2 emissions to the polluters. In contrast with possible program intentions but in line with our theoretical predictions, loan spreads fallby 25% on average starting in 2013. We empirically identify permits storage before program implementation and its associated effect as key drivers of the fall in loan spreads for affected firms, and we show that this dynamic partly undermines the expected reduction in CO2 emissions.
Pollution permits and financing costs
Diversification Benefits of Commodities: A Stochastic Dominance Efficiency Approach
The replication of the modeling framework used for oil realized volatility forecasting on OVX fails. What should be taken into consideration?
Input-Biased Technical Progress and the Aggregate Elasticity of Substitution: Evidence from 14 EU Member States
Production Structure, International Trade and Carbon Footprint