Erasmus University Rotterdam (EUR)
Too_Levered_for_Pigou - with IA.pdf (518.57 kB)

Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation

Download (518.57 kB)
posted on 2023-06-07, 08:06 authored by Robin DöttlingRobin Döttling, Magdalena Rola-Janicka

We analyze jointly optimal carbon pricing and financial policies under finan- cial constraints and endogenous climate-related transition and physical risks. The socially optimal emissions tax may be above or below a Pigouvian benchmark, depending on whether physical climate risks have a substantial impact on collateral values. We derive necessary conditions for emissions taxes alone to implement a constrained-efficient allocation, and show a cap-and-trade system or green subsidies may dominate emissions taxes because they can be designed to have a less adverse effect on financial constraints. Additionally introducing leverage regulation can be welfare-improving if environmental policies have a direct negative effect on financial constraints. Furthermore, our analysis highlights the positive effect of carbon price hedging markets on equilibrium environmental policies. 


Usage metrics

    Rotterdam School of Management