Low-Carbon Investment and Credit Rationing

Abstract

This paper develops a principal-agent model with adverse selection to analyse firms’ decisions between an existing carbon-intensive technology and a new low-carbon technology requiring an externally funded initial investment. We find that a Pigouvian emission tax alone may result in credit rationing and under-investment in low-carbon technologies. Combining the Pigouvian tax with interest subsidies or loan guarantees resolves credit rationing and yields a first-best outcome. An emission tax set above the Pigouvian level can also resolve credit rationing and, in some cases, yields a first-best outcome. If a carbon price is (politically) not feasible, intervention on the credit market alone can promote low-carbon development. However, such a policy yields a second-best outcome. The issue of credit rationing is temporary if the risks of low-carbon technologies decline. However, there are social costs of delay if credit rationing is not addressed.

Mobilizing Credit for Clean Energy: De-Risking and Public Loan Provision Under Learning Spillovers

“…Indeed, there is empirical evidence that emerging clean energy technologies face financing constraints (cf. Haas and Kempa, 2023, for an overview).…”

“…Modern banking theory has extensively studied the potential of credit guarantees or interest rate subsidies to mitigate inefficient credit rationing (Arping et al, 2010;Hainz & Hakenes, 2012;Janda, 2011;Minelli & Modica, 2009;Philippon & Skreta, 2012). These insights on de-risking measures have been extended to the case of low-carbon technologies (Haas & Kempa, 2023), but there is less theoretical clarity about which role the public provision of loans to clean energy projects is supposed to play, if any. The extant literature is primarily centered around public (green) banks-which typically engage both in loan provision and de-risking (Eslava & Freixas, 2021;Whitney et al, 2020)-and suggests various reasons for how these institutions could limit the extent of credit rationing for low-carbon technologies.…”

“…By doing so, our paper suggests another important reason for credit rationing: a coordination failure between borrowers to gain sufficient experience with a novel clean energy technology, adding to the extensive literature on credit rationing. In this regard, our work is related to Haas and Kempa (2023), who explain credit rationing for clean energy technology firms with information asymmetries and unobservable project characteristics that can be addressed via de-risking. However, their model does not endogenize risks or financing experience.…”

“…First, the government can improve the risk-adjusted return for banks, either by increasing the expected return of the loans or by reducing the volatility of returns (Polzin et al, 2019). Two of the most commonly discussed instruments to do so in the literature are interest rate subsidies and credit guarantees (Haas & Kempa, 2023). Due to our framework of risk-adjusted returns, we can represent both of these options as stylized state-financed additive premia on the risk-adjusted return of all private banks in both periods denoted by s 1 , s 2 ≥ 0.…”