Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/223452
Authors: 
Lessmann, Kai
Kalkuhl, Matthias
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8380
Abstract: 
Interest rates are central determinants of saving and investment decisions. Costly financial intermediation distort these price signals by creating a spread between the interest rates on deposits and loans with substantial effects on the supply of funds and the demand for credit. This study investigates how interest rate spreads affect climate policy in its ambition to shift capital from polluting to low-carbon sectors of the economy. To this end, we introduce financial intermediation costs in a dynamic general equilibrium climate policy model. We find that costly financial intermediation affects carbon emissions in various ways through a number of different channels. For low to moderate interest rate spreads, carbon emissions increase by up to 7 percent, in particular, because of lower investments into the capital intensive clean energy sector. For very high interest rate spreads, emissions fall because lower economic growth reduces carbon emissions. If a certain temperature target should be met, carbon prices have to be adjusted upwards by up to one third under the presence of capital market frictions.
Subjects: 
financial friction
banking
greenhouse gas mitigation
JEL: 
E43
G21
Q54
Q58
Document Type: 
Working Paper

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