Carbon Pricing, Credit Reallocation, and Real Effects

This paper asks whether a rise in the price of carbon changes how bank credit is allocated across firms, and whether that credit adjustment shows up in investment, employment and emissions. Identification comes from a reform-driven and, the authors argue, plausibly exogenous increase in EU Emissions Trading System permit prices – a November 2017 package that cut the permit cap and introduced the Market Stability Reserve, pushing prices from 5 to 15 euros per tonne within a quarter and to 20 euros by mid-2018 – combined with quarterly loan-level records from the Italian Credit Registry and firm-level emissions and free-quota data from the European Union Transaction Log. Comparing the 354 Italian ETS firms above and below the median 2016 ratio of permit shortage to total assets in difference-in-differences models over 2016-2019, the paper finds that highly exposed firms expand credit by about 10% relative to less exposed ETS firms, that the expansion runs through term loans rather than credit lines, and that at the firm level total bank credit rises 21%, long-term assets 8% and the wage bill 6%. Emissions do not rise with this investment; the overall relative decline in emission intensity is economically meaningful but not statistically significant, and it is only among treated firms that actually undertake green investment that a statistically and economically significant fall of about 28% in emissions over revenues appears. Banks accommodate the extra demand – exposed firms are no more likely to default and face no tighter collateral or shorter maturities – but lend less readily to exposed firms that were already financially constrained, and banks more exposed to treated ETS firms cut credit to non-ETS firms in brown sectors by about 1%, a reduction too small to move those firms’ total debt or real outcomes. The authors close by stressing that the EU ETS covers a relatively small set of large firms that are generally less financially constrained than a typical small or medium-sized enterprise, so the results should not be read as a forecast of what economy-wide carbon pricing would do.

Andrea Fabiani | Macro Paper Warehouse

Carbon Pricing, Credit Reallocation, and Real Effects