Climate finance intermediation
- Interest rates are central determinants of saving and investment decisions. Costly financial intermediation distorts these price signals by creating a spread between deposit and loan rates. This study investigates how bank spreads affect climate policy in its ambition to redirect capital. We identify various channels through which interest spreads affect carbon emissions in a dynamic general equilibrium model. Interest rate spreads increase abatement costs due to the higher relative price for capital-intensive carbon-free energy, but they also tend to reduce emissions due to lower overall economic growth. For the global average interest rate spread of 5.1 percentage points, global warming increases by 0.2°C compared to the frictionless economy. For a given temperature target to be achieved, interest rate spreads necessitate substantially higher carbon taxes. When spreads arise from imperfect competition in the intermediation sector, the associated welfare costs can be reduced by clean energy subsidies or even eliminated byInterest rates are central determinants of saving and investment decisions. Costly financial intermediation distorts these price signals by creating a spread between deposit and loan rates. This study investigates how bank spreads affect climate policy in its ambition to redirect capital. We identify various channels through which interest spreads affect carbon emissions in a dynamic general equilibrium model. Interest rate spreads increase abatement costs due to the higher relative price for capital-intensive carbon-free energy, but they also tend to reduce emissions due to lower overall economic growth. For the global average interest rate spread of 5.1 percentage points, global warming increases by 0.2°C compared to the frictionless economy. For a given temperature target to be achieved, interest rate spreads necessitate substantially higher carbon taxes. When spreads arise from imperfect competition in the intermediation sector, the associated welfare costs can be reduced by clean energy subsidies or even eliminated by economy-wide investment subsidies.…
Author details: | Kai LessmannORCiDGND, Matthias KalkuhlORCiDGND |
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DOI: | https://doi.org/10.1086/725920 |
ISSN: | 2333-5955 |
ISSN: | 2333-5963 |
Title of parent work (English): | Journal of the Association of Environmental and Resource Economists |
Subtitle (English): | interest spread effects in a climate policy model |
Publisher: | University of Chicago Press |
Place of publishing: | Chicago, IL |
Publication type: | Article |
Language: | English |
Date of first publication: | 2023/12/13 |
Publication year: | 2023 |
Release date: | 2024/01/12 |
Tag: | banking; financial friction; greenhouse gas mitigation; investment subsidy |
Volume: | 11 |
Issue: | 1 |
Number of pages: | 39 |
First page: | 213 |
Last Page: | 251 |
Organizational units: | Wirtschafts- und Sozialwissenschaftliche Fakultät / Wirtschaftswissenschaften / Fachgruppe Volkswirtschaftslehre |
DDC classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Peer review: | Referiert |