Green finance: possible misallocation of portfolio assets and net carbon tax proposals

Addressing environmental problems is an urgent issue across the world. There are roles that finance can play to address environmental problems, providing funds to investments that support progress towards environmental sustainability. However, it seems that funds are not always appropriately allocated to environmentally sound projects. In this chapter, we would like to explain, using a theoretical model, that investors’ asset allocation is distorted due to different criteria used by each environmental rating agency in providing environment scores, and so a rated company has different environmental scores depending on rating agencies. Furthermore, we would like to explain by data analysis that the difference in actual environmental scores occurs using the figures of rating agencies, and that the optimal allocation of funds seems to be distorted. We want to show that introduction of carbon tax is a way to eliminate such distortion of asset allocation. It is desirable to impose tax on net CO2 emissions, after deducting efforts by companies to mitigate emissions, such as afforestation and offshore wind power generation construction that reduce carbon emissions.