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Do firm credit constraints impair climate policy?

Author

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  • Kaldorf, Matthias
  • Shi, Mengjie

Abstract

This paper shows that firm credit constraints impair climate policy. Empirically, firms with tighter credit constraints, measured by their distanceto-default, exhibit a relatively smaller emission reduction after a carbon tax increase. We incorporate this channel into a quantitative DSGE model with endogenous credit constraints and carbon taxes. Credit frictions reduce the optimal investment into emission abatement since shareholders are less likely to receive the payoff from such an investment. We find that carbon taxes consistent with net zero emissions are 24 dollars/ton of carbon larger in the presence of endogenous credit constraints than in an economy without such frictions.

Suggested Citation

  • Kaldorf, Matthias & Shi, Mengjie, 2024. "Do firm credit constraints impair climate policy?," Discussion Papers 29/2024, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:300704
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    More about this item

    Keywords

    Climate Policy; Credit Constraints; Emission Reduction; Corporate Capital Structure; Firm Heterogeneity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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