Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/252054 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9537
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Promoting investment in low carbon "clean" sectors has gained popularity over the last years under the heading of sustainable finance, at the same time raising concerns about adverse welfare effects of such policies. We analyze the economic impact of subsidizing investment in "clean" industries in a stylized two-sector small open economy model. Such a reform increases gross wages, but reduces national income due to the distortion of capital. At given national emissions cap, worldwide emissions rise because imports of the high-carbon good will increase. When adapting the emissions cap, the environmental policy becomes laxer if it is dominated by income effects or by mitigating losses arising from the distortion of the allocation of capital. At the same time, the shrinking high carbon sector reduces income gains from a higher cap and thus works toward a stricter policy. Results are similar if capital in "dirty" industries is taxed. Though sustainable finance policies do seem wasteful, we provide a rationalization in a setting with irreversible investment, where a "green" government" uses such a policy to induce stricter environmental measures after a possible switch to a "conservative" government.
Subjects: 
climate change
global externalities
sustainable finance
small open economy
political economy
JEL: 
F41
H23
H87
Q58
Document Type: 
Working Paper
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