Do firm credit constraints impair climate policy?

Matthias Kaldorf and Mengjie Shi

No 29/2024, Discussion Papers from Deutsche Bundesbank

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.

Keywords: Climate Policy; Credit Constraints; Emission Reduction; Corporate Capital Structure; Firm Heterogeneity (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 Q58 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-ene, nep-env and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:300704

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